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It has been about a month since the last earnings report for Ares Capital (ARCC). Shares have lost about 4.3% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Ares Capital 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 drivers.
Ares Capital Q3 Earnings Beat, Expenses Rise Y/Y
Ares Capital’s third-quarter 2021 core earnings of 47 cents per share beat the Zacks Consensus Estimate of 45 cents. The bottom line reflected a rise of 20.5% from the prior-year quarter.
The results were aided by a rise in total investment income. Portfolio activity remained solid in the quarter. However, an increase in expenses was the undermining factor.
GAAP net income was $334 million or 73 cents per share, down from $441 million or $1.04 per share recorded in the prior-year quarter.
Total Investment Income Improves, Expenses Rise
Total investment income was $442 million, up 25.6% year over year. The rise was driven by an increase in capital structuring service fees, dividend income, and interest income from investments. The top line outpaced the Zacks Consensus Estimate of $438 million.
Total expenses were $253 million, jumping 39%.
Net investment income increased 10.8% to $184 million.
Balance Sheet Strong
As of Sep 30, 2021, the company’s cash and cash equivalents (including restricted cash) totaled $1.21 billion, up from $326 million as of Dec 31, 2020.
Ares Capital had $5.1 billion available for additional borrowings under the existing credit facilities as of Sep 30, 2021. Total outstanding debt was $9.9 billion.
As of Sep 30, 2021, total assets amounted to $19.15 billion and stockholders’ equity was $8.54 billion.
Net asset value was $18.52 per share, up from $16.97 as of Dec 31, 2020.
Portfolio Activities Solid
Gross commitments worth $3.11 billion were made in the third quarter to new and existing portfolio companies. This compares with $706 million worth of gross commitments in the prior-year quarter.
In the reported quarter, the company exited $2.26 billion of commitments compared with $352 million a year ago.
The fair value of Ares Capital’s portfolio investments was $17.68 billion as of Sep 30, 2021. The fair value of accruing debt and other income-producing securities was $15.67 billion.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended upward during the past month.
Currently, Ares Capital has a poor Growth Score of F, however its Momentum Score is doing a lot better with a C. Charting a somewhat similar path, 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 D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Ares Capital has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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