On Dec 2, 2013, we upgraded American Capital, Ltd. (ACAS) to Neutral from Underperform, based on the company’s lower expenses and healthy capital deployment activities.
Why the Upgrade?
American Capital’s impressive capital deployment activities make it an asset for yield-seeking investors. Since the initiation of the share repurchase program, the company has made open market purchases of 83.8 million shares at an average price of $11.02 per share as of Sep 30, 2013.
We are encouraged by such a shareholder-friendly approach. Additionally, we commend the company’s implementation of expense reduction initiatives, which will expectedly boost profitability in the quarters ahead.
The company’s ability to provide flexible financing solutions, which range from senior debt and uni-tranche to mezzanine and equity co-investments is also impressive. Such benefits provided by the company present it as an ideal investment partner to private equity clients and thereby increase its scope to diversify.
However, American Capital’s third-quarter earnings of 8 cents (announced on Nov 5) was below the Zacks Consensus Estimate as well as the prior-year quarter earnings. Disappointing results were due to a fall in the top line. Further, the low interest environment during the quarter was a negative. However, new investments and lower expenses were positives.
Though improvement in the company’s portfolio performance is expected to continue with the economic recovery, we believe that the low interest rate environment and global challenges could be deterrents.
The company’s estimate revisions exhibited a mixed trend. For 2013, the Zacks Consensus Estimate over the past 30 days declined 10% to 83 cents per share. However, for 2014, the Zacks Consensus Estimate rose 6% to $1.06 per share over the same time frame. Thus, American Capital now carries a Zacks Rank #3 (Hold).
Stocks That Warrant a Look
Some better performing stocks in the same sector include Ares Capital Corp. (ARCC), BlackRock Kelso Capital Corp. (BKCC) and Gladstone Investment Corp. (GAIN). All these carry a Zacks Rank #2 (Buy).