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American Capital (ACAS) Q3 Earnings Beat; Costs Rise

American Capital, Ltd.ACAS reported third-quarter 2015 net operating income per share of 28 cents, beating the Zacks Consensus Estimate by a penny. Moreover, results compared favorably with the prior-year quarter earnings of 18 cents.

Results were driven by higher revenues. New investments and realization from portfolios were the other positives. However, higher operating expenses reflected absence of prudent expense management.

Net operating income increased 47% on a year-over-year basis to $75 million. Net loss came in at $37 million or 14 cents per share, compared with net income of $114 million or 41 cents per share in the prior-year quarter.

Performance in Detail

Total operating revenue was $176 million in the quarter, up 36% from the prior-year quarter. The upsurge was primarily due to higher interest and dividend income. Also, operating revenue surpassed the Zacks Consensus Estimate of $166 million.

Total interest and dividend income was $165 million, up 43% year over year. However, fee income declined 21% year over year to $11 million.

Operating expenses rose 8% year over year to $68 million. The rise in expenses was primarily due to higher interest expenses and general and administrative expenses along with European Capital management fees, partially offset by lower salaries, benefits and stock-based compensation.

American Capital's asset coverage ratio decreased to 300% in the quarter from 423% in the prior-year quarter. The company made new investments of $691 million during the quarter while strengthening its balance sheet. Notably, $223 million was invested in Senior Floating Rate Loans, $147 million in Structured Products and $177 million in Sponsor Finance Investments.

American Capital recorded $494 million of cash proceeds from the realization of portfolio investments. This includes $262 million from Senior Floating Rate Loans.

As of Sep 30, 2015, excluding European Capital loans, non-accrual loans were $85 million, representing 2% of total loans at fair value compared with $109 million or 2.7% as of Jun 30, 2015. Further, European Capital non-accrual loans were $42 million, representing 21.6% of total European Capital loans at fair value compared with $28 million, or 15.5% as of Jun 30, 2015.

Net asset value (NAV) per share came in at $20.44, down 10 cents per share from $20.54 as of Sep 30, 2014. The weighted average effective interest rate on the company's debt investments excluding Senior Floating Rate Loans and inclusive of non-accrual loans as of Sep 30, 2015 was 8.7%, down from 9.1% at the end of the prior-year quarter.

Capital Deployment

Beginning in the third quarter of 2015, American Capital's board of directors changed its share repurchase program. Under the new program, $300 million to $600 million of common stock will be bought at a price per share below 85% of the company's most recent quarterly net asset value per share, subject to some conditions. Notably, the repurchases will be made before the spin-off of American Capital Income by the company.

During the reported quarter, American Capital repurchased 9.7 million shares for $135 million at an average price of $13.82 per share. Since the initiation of the program in August 2011, the company has bought back 117.8 million shares for $1.4 billion, at an average price of $12.05 per share.

In Conclusion

In spite of the volatile capital markets affecting valuations of the investment portfolio in the quarter, the overall underlying performance of American Capital's portfolio companies continues to remain positive. Also, we are encouraged by the company's continued efforts in balance sheet repositioning.

Moreover, the completion of the split will help American Capital to focus on its core asset management business and benefit its shareholders. Such a move will make the business transparent for investors and make the company more competitive in the market.

Though the low interest rate environment and global cues might act as headwinds in the upcoming quarters, we believe the improved portfolio performance is expected to continue with the economic recovery.

Currently, American Capital carries a Zacks Rank #3 (Hold). Some better-ranked finance stocks worth considering include Garrison Capital Inc. GARS , New Mountain Finance Corporation NMFC and NewStar Financial, Inc. NEWS . All these stocks sport a Zacks Rank #2 (Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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