American Capital's Earnings & Rev Lag - Analyst Blog

American Capital Ltd. (ACAS) reported first-quarter 2013 operating income of 14 cents per share, lagging the Zacks Consensus Estimate by 14 cents. Moreover, the results compared unfavorably with the prior quarter's earnings of 26 cents per share.

Lower-than-expected results were attributable to lower top-line, followed by a rise in non-accrual loans. Further, the low interest environment during the quarter was a negative. However, new investments and reduction of debt acted as positives.

Net operating income for the quarter came in at $46 million, down from $83 million reported in the prior quarter. Net earnings were reported at $346 million, or $1.09 per share, against $123 million or 38 cents per share in the prior quarter.

Performance in Detail

Total operating revenue was $133 million in the quarter, down 26% from $180 million in the prior quarter, due to lower interest and dividend income and reduced fee income. Additionally, operating revenue was below the Zacks Consensus Estimate of $149 million.

In the quarter under review, total interest and dividend income was $122 million, down 22% from $157 million in the prior quarter. The weighted average effective interest rate on the company's debt investments as of Mar 31, 2013, was 10.6%, decreasing 80 basis points from the end of the prior quarter. Moreover, fee income plummeted 52% on a sequential basis to $11 million.

Operating expenses remained stable at $65 million. The decline in interest expenses  was offset by elevated salaries, benefits and stock-based compensation.

As of Mar 31, 2013, non-accrual loans were $208 million, representing 11.3% of total loans at fair value, up from $177 million of non-accrual loans, indicating 9.0% of total loans at fair value, as of Dec 31, 2012. The increase in non-accrual loans were driven by new non-accruing loans due to weak performance by the company.

Net asset value (NAV) per share came in at $19.04 in the quarter, up 7.0% or $1.20 per share sequentially. 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 continue to remain positive. Management not only anticipates an improvement in the portfolio along with an economic recovery, but also expects to post an enhanced book value.

American Capital's asset coverage ratio improved substantially to 956% from 801% in the prior quarter. The company repaid securitized debt of $113 million in the quarter under review and increased investments by $98 million while strengthening its balance sheet. Moreover, the company recorded $281 million of cash proceeds from realizations of portfolio investments during the quarter.

Share Repurchase Update

During first-quarter 2013, American Capital repurchased 9 million shares worth $128 million, at an average price of $14.23 per share. Since the beginning of the new repurchase program, adopted in Sep 2011, the company repurchased 61.4 million shares of common stock for $624 million at an average price of $10.16 per share.

Our Viewpoint

American Capital's successful restructuring of debt empowered it with sufficient operating flexibility. Moreover, the capital deployment by the company raises our hopes for an enhancement of investors' confidence.

The company is also capable of providing flexible financing solutions ranging from a variety of senior debt and uni-tranche to mezzanine and equity co-investments. Further, American Capital provides multi-currency funding with underwriting platform globally, thereby boosting growth of its portfolio companies. Such benefits provided by the company compel private equity clients to consider it as an investment partner, which in turn, helps it diversify.

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

Shares of American Capital currently carry a Zacks Rank #1 (Strong Buy). Among other companies in the same sector that are worth considering include KCAP Financial Inc. (KCAP) with a Zacks Rank #1, along with Medallion Financial Corp. (TAXI) and Gladstone Investment Corporation (GAIN) with a Zacks Rank #2 (Buy).