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American Capital (ACAS) Q1 Earnings Beat on Lower Costs

American Capital, Ltd. ACAS reported first-quarter 2016 net operating income per share of 31 cents, beating the Zacks Consensus Estimate of 25 cents. Moreover, results compared favorably with the prior-year quarter earnings of 18 cents.

The better-than-expected results were driven by higher revenues and lower expenses. New investments and realization from portfolios were the other positives.

Net operating income increased 48% on a year-over-year basis to $74 million. Net loss came in at $80 million or 34 cents per share, as against net income of $15 million or 5 cents in the prior-year quarter.

Performance in Detail

Total operating revenue was $162 million in the quarter, up 5% from the prior-year quarter. The was primarily driven by higher interest and dividend income.

Total interest and dividend income was $149 million, up 8% year over year. However, fee income declined 19% year over year to $13 million.

Operating expenses declined 11% year over year to $68 million. The fall in expenses was primarily due to lower interest expenses, reduced salaries, benefits and stock-based compensation along with reduced European Capital management fees, partially offset by higher general and administrative expenses.

American Capital’s asset coverage ratio increased to 600% in the quarter from 370% in the prior-year quarter. The company made new investments of $132 million during the quarter while strengthening its balance sheet. Notably, $33 million was invested in American Capital Asset Management, LLC (“ACAM”) and $65 million in Sponsor Finance and other Investments.

American Capital recorded $635 million of cash proceeds from the realization of portfolio investments. This includes $378 million from Senior Floating Rate Loans, $126 million from Sponsor Finance and other investments, $43 million from the sale of a major portion of commercial mortgage portfolio and $132 million from new investments.

As of Mar 31, 2016, excluding European Capital loans, non-accrual loans were $115 million, representing 5.1% of total loans at fair value compared with $103 million or 4.4% as of Dec 31, 2015. Further, European Capital non-accrual loans were $22 million, representing 48.9% of total European Capital loans at fair value compared with $18 million, or 16.8% as of Dec 31, 2015.

Net asset value (NAV) per share came in at $20.14, up 2 cents per share from $20.12 as of Mar 31, 2015. The weighted average effective interest rate on the company’s debt investments excluding Senior Floating Rate Loans and inclusive of non-accrual loans as of Mar 31, 2016, was 8.6%, down from 8.9% at the end of the prior-year quarter.

Capital Deployment

Initiated in the third quarter of 2015, American Capital's share repurchase program has been altered. Under the new program, $600 million to $1 billion of common stock will be bought at a price per share below 85% of the company’s most recent quarterly net asset value per share, subject to some conditions.

During the reported quarter, American Capital repurchased 21.2 million shares for $297 million at an average price of $13.96 per share. Since the initiation of the program in Aug 2011, the company bought back 159.7 million shares for $2 billion, at an average price of $12.62 per share.

In Conclusion

In spite of the volatile capital markets affecting valuations of the investment portfolio in the quarter, the overall underlying performance of American Capital’s portfolio companies continues to remain positive. Also, we are encouraged by the company’s continued efforts in balance sheet repositioning.  

Though the low interest rate environment and global cues might act as headwinds in the upcoming quarters, the portfolio performance and cost management initiatives will continue to reap significant benefits.

Currently, American Capital carries a Zacks Rank #3 (Hold). Better-ranked finance stocks include Apollo Investment Corporation AINV, OFS Capital Corporation OFS and Safeguard Scientifics, Inc. SFE. All these stocks carry a Zacks Rank #2 (Buy).

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