The favorable equity market continues to benefit Hercules Technology Growth Capital, Inc. (HTGC), as the company reported its fifth consecutive earnings beat after the closing bell on Feb 27. The company’s fourth-quarter 2013 distributable net operating income (DNOI) came in at 34 cents per share, outpacing the Zacks Consensus Estimate of 31 cents. This also compared favorably with the year-ago DNOI of 27 cents.
Results benefited from improvement in interest and fee income as well as disciplined expense management. Overall, Hercules Technology ended the quarter with an impressive performance, comprising a higher level of liquidity.
For the full year 2013, Hercules Technology recorded earnings per share of $1.34 versus $1.07 in 2012. Earnings for the year also comfortably surpassed the Zacks Consensus Estimate of $1.23.
DNOI grew 44.4% year over year to $20.5 million. For the full year, DNOI came in at $79.0 million, rising 51.0% from $52.3 million in 2012.
Performance in Detail
Hercules Technology’s total investment income was $33.2 million, up 21.2% from $27.4 million in the prior-year quarter. This was driven by a 15.8% rise in total interest income and 65.9% increase in total fees. However, the figure lagged the Zacks Consensus Estimate of $37.0 million.
For 2013, total revenue came in at $139.7 million, up 43.3% from $97.5 million in 2012. Moreover, total revenue surpassed the Zacks Consensus Estimate of 133.0 million.
Total operating expenses (excluding interest expense and loan fees) were $14.3 million, almost in line with prior-year quarter figure. Expenses were under control in the reported quarter due to a 42.3% decline in total employee compensation. However, this was partly offset by a rise of 15.6% in interest expense, 56.0% in loan fees and 27.3% in general and administrative costs.
As of Dec 31, 2013, the weighted average cost of debt comprising interest and fees, was 6.4% versus 6.3% as of Sep 30, 2012.
Net investment income (before investment gains and losses) for the quarter came in at $18.9 million, up 44.3% year over year.
Business Highlights
The fair value of Hercules Technology’s total investment portfolio was $910.3 million as of Dec 31, 2013, down 7.4% from $983.4 million as of Sep 30, 2013. In the quarter, the company provided approximately $126.0 million in debt commitment to new and existing portfolio companies.
As of Dec 31, 2013, Hercules Technology’s net asset value was $10.51 per share, compared with $9.75 as of Dec 31, 2012.
Our Viewpoint
Hercules Technology’s efficient capital deployment activities are impressive and these will keep investors in its favor. The company hiked its dividend twice in 2013. We expect the company to continue enhancing shareholder value in the forthcoming quarters, given its solid liquidity position. Moreover, Hercules Technology’s portfolio expansion and its solid Initial public offering pipeline will expectedly boost profitability.
However, the uncertain economic environment might increase the cost of funding and limit the company’s growth going forward.
Currently, Hercules Technology carries a Zacks Rank #3 (Hold). Some better-ranked financial organizations include Apollo Investment Corporation (AINV), Gladstone Investment Corporation (GAIN) and Horizon Technology Finance Corporation (HRZN). All these stocks have a Zacks Rank #2 (Buy).
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