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Ares Capital (ARCC) Stock Gains 2.8% on Q4 Earnings Beat

Zacks Equity Research

Shares of Ares Capital Corporation ARCC have gained 2.8%, following the release of the company’s fourth-quarter and 2018 results. Core earnings of 45 cents per share for the quarter surpassed the Zacks Consensus Estimate of 41 cents. The bottom line increased 18.4% from the year-ago quarter.

Results reflected improved total investment income and healthy portfolio activity. Moreover, a decline in expenses was a positive for the company. However, it exited the reported quarter with lower cash and cash equivalents.

GAAP net income for the quarter under review was $153 million or 36 cents per share, down from $232 million or 54 cents per share in the prior-year quarter.

For 2018, core earnings were $1.68 per share, up from $1.39 in 2017. The figure surpassed the Zacks Consensus Estimate of $1.63. GAAP net income was $858 million or $2.01 per share, up from $667 million or $1.57 per share in 2017.

Total Investment Income Improves, Expenses Decline

Total investment income amounted to $345 million, up 12.4% year over year. The rise was driven by an increase in all income components. Moreover, the figure surpassed the Zacks Consensus Estimate of $327.2 million.

For 2018, total investment income was $1.34 billion, up from $1.16 billion recorded in the prior year. Also, the figure surpassed the Zacks Consensus Estimate of $1.32 billion.

Total expenses witnessed a year-over-year decrease of 12.8% to $150 million. The decline was due to a fall in other general and administrative expenses, and lack of professional fees and other costs related to the American Capital acquisition.

Net investment income surged 45% year over year to $203 million.

Strong Balance Sheet

As of Dec 31, 2018, the company’s cash and cash equivalents totaled $296 million, down from $316 million as of Dec 31, 2017. Total outstanding debt was $5.21 billion, up from $4.85 billion on Dec 31, 2017.

As of Dec 31, 2018, Ares Capital’s total assets amounted to $12.90 billion, up 4.4% from the Dec 31, 2017 level. Stockholders’ equity was $7.30 billion as of Dec 31, 2018, up from $7.10 billion as of Dec 31, 2017.

Further, net asset value was $17.12 per share, up from $16.65 as of Dec 31, 2017.

Portfolio Activities

New commitments worth $2.71 billion were made during the reported quarter, up from nearly $1.51 billion recorded in the prior-year quarter. The company exited $1.02 billion of commitments in the reported quarter compared with $1.32 billion in the year-ago quarter.

Dividend Update

Concurrently, the company declared a quarterly dividend of 40 cents per share, marking a hike of 2.6% from the prior payout. The dividend will be paid on Mar 29 to shareholders of record as of Mar 15. Additionally, the company’s board of directors announced a special dividend of 2 cents per share to be paid on the same date as the normal dividend.

Our Take

Ares Capital’s investment income growth is expected to continue, driven by the rise in demand for customized financing and improving economy. Further, the company’s steady capital deployment plan reflects a strong liquidity position. However, mounting expenses (primarily due to expansion plans) may hurt the bottom line. Also, the presence of high debt levels remains a major concern for the company.

Ares Capital Corporation Price, Consensus and EPS Surprise

Ares Capital Corporation Price, Consensus and EPS Surprise | Ares Capital Corporation Quote

Currently, Ares Capital carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Earnings Release Dates of Other Finance Stocks

Solar Senior Capital Ltd. SUNS, BlackRock TCP Capital Corp. TCPC and Garrison Capital Inc. GARS are scheduled to announce results on Feb 21, Feb 28 and Mar 5, respectively.

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