Ares Capital Reports in Line Earnings, Shares Fall - Analyst Blog

Share price of Ares Capital Corporation ARCC slumped by 2.8% following its first quarter 2014 earnings release on tuesday before the opening bell as well as negative broader market sentiments. Core earnings came in at 38 cents per share, which was in line with the Zacks Consensus Estimate as well as the year-ago quarter figure.

Results benefited from an improvement in total investment income. Further, rise in new investment commitments and a steady balance sheet position were the tailwinds. However, a persistent rise in expenses continued to dampen the result.

GAAP net income came in at $117.0 million, up 45.5% from the year-ago quarter.

Highlights for the Quarter

Ares Capital's total investment income came in at $239.7 million, up 22.9% from the prior-year quarter. The rise was driven by an increase in all the components barring dividend income. The reported figure also exceeded the Zacks Consensus Estimate of $225.0 million.

Total operating expenses was $122.0 million, up 32.4% from the year-ago period. This was due to increased interest and credit facility fees, base management cost, incentives and administrative expense partially offset by lower other general and administrative expenditures.

Net investment income came in at $112.3 million, up 13.4% from the year-ago quarter.

As of Mar 31, 2014, cash and cash equivalents were $146.6 million. Total debt outstanding was $3.1 billion. Further, the company has $2.1 billion available for additional borrowing as per its present credit facility.

Notably, loans on non-accrual status represented 3.2% of total investments at amortized cost.

Business Transactions

While there were new investment commitments worth $852.1 million, Ares Capital exited $849.2 million worth commitments in the reported quarter. Further, from Apr 1 to Apr 30, additional new investment commitments of $303.0 million were made. However, it exited from $401.0 million commitments during the same time frame.

As of Mar 31, 2014, Ares Capital's total assets were $8.2 billion. Stockholders' equity was $4.9 billion and net asset value was $16.42 per share.

Our Viewpoint

Steady growth in investment commitments will continue to support Ares Capital's top line growth in the forthcoming quarters. Further, we believe that company will continue to enhance its portfolio given its solid liquidity position. However, we remain skeptical about rising expenses as well as uncertain economic scenario.

Currently, Ares Capital carries a Zacks Rank #3 (Hold). Some better-ranked financial organizations include PennantPark Investment Corporation PNNT, Solar Capital Ltd. SLRC and Central Pacific Financial Corp. CPF. All three of these stocks hold a Zacks Rank #1 (Strong Buy).