On Aug 14, 2014, we issued an updated research report on American Capital, Ltd. (ACAS). Though this Maryland-based private equity firm and global asset manager has not exhibited decent results over the past few quarters, the company has been striving hard to boost earnings through repositioning its balance sheet and other initiatives.
We remain encouraged owing to American Capital’s continued efforts in balance sheet repositioning. Further, to better align the organization and given the company’s current performance track towards these efforts, management intends to separate investments from the asset management business. Such a proposal along with a bid for restructuring is expected to be put forward to the company’s board of directors in fourth-quarter 2014.
Management expects the possible separation to enhance shareholder value. If the strategic spin-off materializes, the company will benefit in the long run owing to specialized focus.
Also, the company has been able to manage expenses over the past few years – expenses reduced 9%, 27% and 3% year over year, in 2011, 2012 and 2013, respectively. The trend continued in the first half of 2014.
Further, in May 2014, American Capital penned an agreement with a group of investors to form American Capital Equity III (ACE III). The deal, which is expected to close in third-quarter 2014, will result in a broader investor base, bring in new private equity limited partners and increase earnings assets under management by $0.9 billion or 7%.
Nevertheless, we believe the initiatives take by the company will take some time to show results. Also, the company is still recovering from the financial crisis that limited its access to the global debt and equity capital markets and resulted in significant depreciation of its investment portfolio and overleveraging of balance sheet.
Weak fundamentals and dismal results at American Capital triggered a downward revision in the Zacks Consensus Estimate. This is evident from the movement witnessed in the Zacks Consensus Estimate over the past 30 days. It decreased 15.3% to 61 cents per share for 2014 and 9.8% to 92 cents per share for 2015.
American Capital currently carries a Zacks Rank #5 (Strong Sell).
Some better-ranked stocks in the finance space include Select Bancorp, Inc. (SLCT), Piper Jaffray Companies (PJC) and Capital One Financial Corp. (COF). All these stocks carry a Zacks Rank #1 (Strong Buy).