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Hercules Tech (HTGC) Down 6.7% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research
Here at Zacks, our focus is on the proven Zacks Rank system, which emphasizes earnings estimates and estimate revisions to find great stocks. Nevertheless, we are always paying attention to the latest value, growth, and momentum trends to underscore strong picks.

A month has gone by since the last earnings report for Hercules Technology (HTGC). Shares have lost about 6.7% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Hercules Tech due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Hercules Capital Q4 Earnings Beat, Revenues Rise

Hercules Capital, Inc.’s fourth-quarter 2018 net investment income (NII) of 32 cents per share surpassed the Zacks Consensus Estimate of 31 cents. The figure was also 10.3% higher than the year-ago figure.

Results reflect higher revenues and growth in the investment portfolio. However, lower net asset value and rise in operating expenses were the undermining factors.

Distributional net operating income was $33.9 million or 35 cents per share, up from $26.1 million or 31 cents per share reported in the prior-year quarter.

For 2018, the company reported NII of $1.19 per share, up from $1.16 recorded in the prior year. The figure also surpassed the Zacks Consensus Estimate of $1.18.

Total Investment Income Improves, Expenses Flare Up

Total investment income for the reported quarter was $56.9 million, up 13.3% from the year-ago period. This upside was mainly driven by higher average debt investment balance and overall rise in the core yield. Further, the reported figure exceeded the Zacks Consensus Estimate of $54.7 million.

Total investment income for 2018 was $207.8 million, up 8.8% from the 2017 figure. The figure also outpaced the Zacks Consensus Estimate of $205.5 million.

Total operating expenses for the reported quarter rose 2.4% year over year to $26.3 million. The upswing largely stemmed from higher interest expenses, general and administrative costs, and total employee-compensation costs.

Total Portfolio Value & New Commitments

The fair value of Hercules Capital’s total investment portfolio was $1.9 billion as of Dec 31, 2018.

In the reported quarter, the company provided $249.4 million in new debt and equity-financing commitments.

Balance Sheet Position

As of Dec 31, 2018, Hercules Capital’s net asset value was $9.90 per share compared with $10.38 as of Sep 30, 2018. This decline was chiefly due to a change in unrealized depreciation.

The company had $156.2 million in liquidity — including $34.2 million in unrestricted cash and cash equivalents, and $122 million in credit facilities — as of Dec 31, 2018.

At the end of the fourth quarter, the weighted average cost of debt, comprising interest and fees, was 5.3%, down 1.1% from the prior-year quarter end.

Outlook

Management expects each 25 basis points rise in Prime Rate to contribute nearly $3.9 million or 4 cents per share of NII annually.

The company expects 2019 to record early payoff of around $350-$375 million. Out of which, $75 million in early payoffs are expected in first and second quarters of 2019.

Hercules Capital expects NII to grow in 2019 and exceed its current distribution level of 31 cents per share.

The company expects total new commitments in 2019 to exceed 2018 level of $1.2 billion.

In 2019, Hercules Capital expects core yields to be around 12.5-13.5%.

Return on equity (ROE) is anticipated to increase as the company continues to modestly rise leverage to its portfolio.

The company expects to maintain leverage at 1.25x in 2019 and intends to increase the same in 2020 if market conditions remain favorable.

Hercules Capital projects operating expenses of $14.5-$15 million in the first quarter of 2019. Further, management expects to incur nearly $1.6 million or 2 cents per share for additional fee expenses related to early repayment of the 2024 notes.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined during the past month.

VGM Scores

Currently, Hercules Tech has a poor Growth Score of F, however its Momentum Score is doing a lot better with a B. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Hercules Tech has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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