American Capital (ACAS) Q4 Earnings Meets Expectations

American Capital, Ltd. ACAS reported fourth-quarter 2015 net operating income per share of 24 cents, in line with the Zacks Consensus Estimate. However, results compared unfavorably with the prior-quarter earnings of 28 cents.

Results reflected a decline in operating revenue and rise in expenses. However, new investments and realization from portfolios were the positives.

Net operating income for the quarter was $61 million, down 19% sequentially. Net loss came in at $227 million or 88 cents per share, compared with net loss of $37 million or 14 cents per share in the prior quarter.

For 2015, net operating income was $253 million or 95 cents per share compared with $117 million or 42 cents per share in 2014. This Zacks Consensus Estimate was $1.30 per share.

Net loss was $187 million or 70 cents per share for the year, compared with net earnings of $434 million or $1.55 per share in 2014.

Last month American Capital announced that it has concluded the initial phase of its strategic review and will proceed with soliciting offers to buy the company or its various business lines wholly or partially. While the initial phase of the strategic review process has been completed, the strategic review process is currently underway.

Performance in Detail

For 2015, total operating revenue was $671 million, up 42.5% year over year. Also, operating revenue surpassed the Zacks Consensus Estimate of $634 million.

Total operating revenue was $173 million in the quarter, down 2% sequentially. The decline was primarily due to reduced interest and dividend income. However, operating revenue came in line with the Zacks Consensus Estimate.

Total interest and dividend income was $153 million, down 7% sequentially. However, fee income increased 82% from the prior quarter to $20 million.

Operating expenses increased 15% sequentially to $78 million. The rise in expenses was primarily due to elevated salaries, benefits and stock-based compensation along with higher general and administrative expenses.

American Capital's asset coverage ratio increased to 482% in the quarter from 300% in the prior quarter. The company made new investments of $686 million during the quarter while strengthening its balance sheet. Notably, $462 million was invested in Sponsor Finance and $125 million was invested in American Capital Asset Management, LLC (ACAM) and Fund Development and the remaining $99 million covered areas including Senior Floating Rate Loans and Structured Products.

American Capital recorded $2.4 billion of cash proceeds from the realization of portfolio investments. Notably, during the quarter, the company sold $2 billion of senior floating rate loans and significantly liquidated the portfolio, and paid down $1.3 billion associated debt.

As of Dec 31, 2015, non-accrual loans were $103 million, representing 4.4% of total loans at fair value compared with $85 million or 2.0% as of Sep 30, 2015. Net asset value NAV per share came in at $19.88, down 3% from $20.44 as of Sep 30, 2015. The weighted average effective interest rate on the company's debt investments excluding Senior Floating Rate Loans and including non-accrual loans as of Dec 31, 2015 was 8.5%, down from 8.7% at the end of the prior quarter.

Share Repurchase

During the reported quarter, American Capital repurchased 20.7 million shares for $298 million at an average price of $14.44 per share. Since the initiation of the program in August 2011, the company has bought back 138.5 million shares for $1.4 billion, at an average price of $12.41 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. Though the improved portfolio performance is expected to continue with the economic recovery, we believe the current global concerns might act as headwinds in the upcoming quarters.

Currently, American Capital carries a Zacks Rank #2 (Buy). Some other top-ranked stocks in the finance space include PrivateBancorp, Inc. PVTB Chemical Financial Corporation CHFC and WSFS Financial Corp. WSFS, each sporting a Zacks Rank #1 (Strong Buy).

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