Shares of Ares Capital Corporation (ARCC) gained nearly 1.4% following the third-quarter 2014 earnings release before the opening bell on Nov 4. Core earnings came in at 40 cents per share, beating the Zacks Consensus Estimate by 5.3%. However, the bottom line came in much lower than the prior-year quarter figure of 48 cents per share.
Results were aided by higher total investment income (revenue), which was, however, partially offset by mounting expenses. Further, a rise in new investment commitments and a steady balance sheet position were the positives in the quarter.
GAAP net income totaled $177.7 million, up 26.2% from the prior-year quarter.
Details
Ares Capital’s total investment income came in at $253.4 million, up 2.7% year over year. The rise was due to an increase in interest income from investments, capital structuring service fees and higher management and other fees, partly offset by lower dividend income and other income. Also, the figure surpassed the Zacks Consensus Estimate of $249 million.
Total operating expenses rose 20.6% year over year to $140.6 million. This was due to a rise in all the elements of expenses, except income-based fees and administrative fees.
Net investment income declined 16.6% year over year to $105.3 million.
As of Sep 30, 2014, cash and cash equivalents amounted to $107.9 million. Total debt outstanding was $3.8 billion. Further, the company has $1.4 billion available for additional borrowing as per its present credit facility.
Notably, loans on non-accrual status represented 2.2% of total investments at amortized cost for the quarter.
Business Transactions
New investment commitments worth $1,318.0 million were made during the quarter, up from $1,132.0 million in the prior-year quarter. Ares Capital exited $654.2 million worth of commitments in the reported quarter. Further, during Oct 1 to Oct 29, additional new investment commitments of $317 million were realized. However, the company also exited commitments worth $456 million during the same time frame.
As of Sep 30, 2014, Ares Capital’s total assets amounted to $9.2 billion compared with $7.8 billion as of Sep 30, 2013. Stockholders’ equity totaled $5.2 billion and net asset value came in at $16.71 per share as of Sep 30, 2014, up 19.5% and 2.2% respectively, from the year-ago quarter.
Our Viewpoint
A steady rise in investment commitments is expected to enhance top-line growth in the upcoming quarters. Moreover, the company may continue to enhance its portfolio, given its solid liquidity position.
However, the company’s failure to control expenses remains a matter of concern. Also, intensifying competition and the prevailing uncertain economic scenario may keep the company’s fundamentals under pressure going forward.
Currently, Ares Capital carries a Zacks Rank #3 (Hold). Some better-ranked financial organizations include Saratoga Investment Corp. (SAR), Alcentra Capital Corp. (ABDC) and Fifth Street Senior Floating Rate Corp. (FSFR). While Saratoga Investment sports a Zacks Rank #1 (Strong Buy), both Alcentra Capital and Fifth Street Senior Floating Rate hold a Zacks Rank #2 (Buy).
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