On Mar 11, 2013, we reaffirmed our Neutral recommendation on
Hercules Technology Growth Capital, Inc.
) based on its better-than-expected results, robust capital
deployment activities and huge growth prospects. However,
insufficient experience, concentration risk and stringent
regulatory landscape are expected to mar Hercules' profitability
in the near to medium term.
Why the Neutral Stance?
Though Hercules' fourth-quarter results (announced on Feb 28)
outpaced the Zacks Consensus Estimate, it came in line with the
prior quarter's earnings. Better-than-expected quarterly results
were mainly driven by improvement in total investment income,
partly offset by higher interest expense, loan fees and increased
Further, in the past 30 days, few estimates have moved up,
resulting in only a 0.9% improvement in the Zacks Consensus
Estimate for 2013. Estimates for 2014 have also improved by 2.5%
over the same period. In addition, over the past four quarters,
the average earnings surprise has been only 5.7% for this Zacks
Rank #2 (Buy) stock.
The dividend growth story has been decent at Hercules. In Feb
2013, the company last increased its quarterly dividend by about
4.2% to 25 cents per share, thereby boosting investors'
confidence in the stock. Also, in 2012, it originated roughly
$636.6 million in total debt and equity commitments to new and
existing portfolio companies. The company continues to experience
an increase in new investment origination activities and expects
the trend to persist in the near future.
Yet, insufficient experience seems to be one of the major
setbacks for Hercules. The company is comparatively a new
venture, having commenced its investment operations late in 2004,
and therefore has a few records to offer in support of its
investment approach. Additionally, concentration risk and
increased regulatory compliance are likely to thwart its growth
Other Stocks to Consider
Other stocks in the same sector that are performing well and are
worth considering include
American Capital, Ltd.
Golub Capital BDC, Inc
Main Street Capital Corporation
). American Capital and Golub Capital hold Zacks Rank #1(Strong
Buy), whereas Main Street carries a Zacks Rank #2.
AMER CAP LTD (ACAS): Free Stock Analysis
GOLUB CAPITAL (GBDC): Free Stock Analysis
HERCULES TECH (HTGC): Free Stock Analysis
MAIN STREET CAP (MAIN): Free Stock Analysis
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