On May 23, 2013, we reiterated our long-term recommendation on Hercules Technology Growth Capital, Inc. (HTGC) at Neutral. Our decision rests on its strong capital position and improved capital deployment activities. However, its investment and credit management strategies remain concerns.
Why the Neutral Stance?
Hercules’s first-quarter 2013 Distributable Net Operating Income (:DNOI) came in at $0.30 per share, surpassing the Zacks Consensus Estimate of $0.25. Results were primarily driven by improvement in total investment income.
The Zacks Consensus Estimate for 2013 remained stable at $1.09 per share over the last 60 days. However, for 2014, the Zacks Consensus Estimate went down 2.4% to $1.22 per share over the same time frame. Hence, the company currently has a Zacks Rank #3 (Hold).
Hercules’ capital deployment activities have been impressive. In May 2013, the company hiked its quarterly cash dividend by 8.0% to $0.27 per share. Previously, in Feb 2013, the company increased its quarterly dividend by about 4.2%. All these activities are expected to boost shareholders’ confidence.
Moreover, the venture capital market for technology-related companies is active and showing signs of improved investment activity. Therefore, a specialty finance company like Hercules is expected to receive attractive returns by providing venture capital to such companies.
However, its focus on early-stage venture companies can act as a headwind, if the products of any of its investment companies fail or the companies are unable to manage additional funding from outside.
Further, Hercules’ investment activities are primarily concentrated in the U.S. based companies. Following the latest financial crisis, the U.S. market has been experiencing illiquidity in the debt capital markets. Though the economy is recovering, a low interest-rate environment and persistent regulatory constraints may lead to increased costs of funding.
Other Firms to Consider
Other financial institutions to consider include Gladstone Investment Corporation (GAIN) with a Zacks Rank #1 (Strong Buy), and ICG Group, Inc. (ICGE) and Fifth Third Bancorp (FITB) with a Zacks Rank #2 (Buy).
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