5 Reasons to Add American Capital (ACAS) to Your Portfolio

With the successful completion of the ongoing spin-off plan, following which earnings assets under management are expected to increase at a 10% compounded annual growth rate for the first three years, American Capital, Ltd. ACAS can be a solid bet now. American Capital's focus on growing its Sponsor Finance business and enhancing its portfolio of companies is expected to augur well in the long run and expected to yield positive results for the stock.

Further, the recent interest rate hike is expected to bring further stability to top-line generation, which creates a buying opportunity for long-term horses. Though there is uncertainty regarding materialization of the strategic split, we remain optimistic about the strategic review as it is likely to propose beneficial options.

With $80.1 billion in assets under management as of Sep 30, 2015, American Capital is the promising S&P 500 alternative asset management company, with strong potential for growth.

Why is it a Solid Choice?

Promising Sponsor Finance business: According to the revised spin-off plan, American Capital intends to split its business into one Business Development Company ("BDC") so as to expand its Sponsor Finance business. Such separation of investment from asset management will likely help the company operate on a larger scale.

Capital Deployment: Nearly 20.7 million common shares were repurchased during the fourth quarter of 2015. The repurchases were carried out under the company's recently revised share repurchase program, which was expanded to buy back shares in the range of $600 million to $1 billion. Under the terms of the program, the company will repurchase shares at a price per share below 85% of the company's net asset value of $20.44 per share as of Sep 30, 2015. Further, it is expected to be completed by Jun 30, 2016.

Leverage: American Capital's debt/equity ratio stands at 0.39 against the industry average of 0.49, reflecting lower debt burden compared with the industry. It indicates the company's better financial flexibility.

Favorable Zacks Rank: American Capital currently carries a Zacks Rank #1 (Strong Buy). For 2015, the Zacks Consensus Estimate increased 8.3% to $1.30 per share, over the last 30 days.

Earnings ESP: An Earnings ESP of +12.50%, combined with a Zacks Rank #1 (Strong Buy), conclusively shows that American Capital is likely to beat the Zacks Consensus Estimate in the upcoming release.

Bottom Line

With an interest rate hike in December and with the assumption of further interest raises, American Capital is likely to deliver strong top-line performance, as it derives nearly 90% of its revenues from interest and dividend income. Besides, its Sponsor Finance business exhibits eminent growth potential.

Moreover, the company's disciplined approach toward expense reduction will boost its profitability. Notably, expenses have declined at a CAGR of 7.7% in the past 5 years (2010-2014).

Other Stocks to Consider  

Some other stocks in the banking space worth considering include KCAP Financial, Inc. KCAP, Capitala Finance Corp. CPTA and Safeguard Scientifics, Inc. SFE. All three stocks carry a Zacks Rank #2 (Buy).

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