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KCAP Financial, Inc. (KCAP): Zacks Rank Buy

Zacks Equity Research

Earnings momentum for KCAP Financial, Inc. (KCAP) has been strong following its second quarter results, sending this private equity firm to a Zacks #1 Rank (Strong Buy). The stock also hit its 52-week high on September 14. A continued improvement in investment income should help KCAP to improve profitability in the upcoming quarters.

In addition, a P/B multiple of just 1.2 makes this stock an attractive pick for value investors.

Impressive Second Quarter Results

On August 8, KCAP Financial reported second quarter 2012 net investment income per share of 23 cents, topping the Zacks Consensus Estimate of 20 cents by 15.0% and soaring from last year's 12 cents by 91.7%. Growth in total interest income was the main factor behind this improvement, partially offset by higher operating expenses.

Net investment income of $6.0 million more than doubled from last year. However, total expenses increased 2.9% to $3.5 million from $3.4 million in the year-ago period, aided by higher administrative and insurance expenses.

Earnings Estimates on an Upswing

Over the last 60 days, the Zacks Consensus Estimate for 2012 advanced 7.7% to 84 cents per share, implying year-over-year growth of 20.0%. For 2013, the Zacks Consensus Estimate increased 16.5% to 99 cents, indicating year-over-year growth of 17.3%.

Reasonable Valuation

Along with a P/B multiple of 1.2, KCAP Financial has a forward P/E ratio as low as 10.5. (A P/E ratio under 15.0 and a P/B ratio below 3.0 generally indicate value). Furthermore, the company's share price has gained nearly 44.7% year to date.

Additionally, KCAP Financial enjoys a dividend yield of 10.9%. The company also enhanced its quarterly dividend from 18 cents per share to 24 cents in the second quarter of 2012. Therefore, in addition to being a value stock, the company offers a promising income opportunity.

Headquartered in New York, KCAP Financial, a private equity and venture capital firm, invests in mid market, buyouts and mezzanine investments. With $3.4 billion of assets under management, the company invests through senior debt, second lien debt, secured and unsecured subordinated debt, mezzanine debt and equity. With a market cap of about $234.4 million, KCAP Financial competes with American Capital, Ltd. (ACAS), among others.

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