On Dec 22, 2014, we issued an updated research report on American Capital, Ltd. (ACAS). Though this Maryland based private equity firm and global asset manager has not exhibited decent results over the past few quarters except third-quarter 2014, the company’s proposed split is expected to boost the financial performance going forward.
In Nov 2014, American Capital revealed its plan to split the businesses through transfer of most of the investment assets into two new Business Development Companies (BDCs) – American Capital Growth and Income and American Capital Income, while American Capital will continue to operate its asset management business. The company intends to spin off the two BDCs to its shareholders and this will result in three publicly-traded firms.
The company believes that the possible separation of the investments from the asset management business will not only lead to a better makeover of its business but will generate substantial benefits to its shareholders as well. We believe that upon materialization of the strategic spin-off, the company will benefit in the long run owing to specialized focus.
Further, American Capital revealed that it has developed cost saving initiatives due to changes in the composition of the company’s investment portfolio and market conditions. These initiatives are expected to reduce costs annually by about $25 million, commencing in early 2015.
Despite positives, we remain cautious as the company is still recovering from the financial crisis that limited its access to the global debt and equity capital markets and resulted in significant depreciation of its investment portfolio and overleveraging of balance sheet. Also, concentration risk rises as operating revenues are heavily skewed towards interest and dividend income, which constituted around 86% of the total operating revenue for the nine months ended Sep 2014.
Over the past 30 days, Zacks Consensus Estimate remained stable at 59 cents per share and 77 cents per share for 2014 and 2015, respectively.
American Capital currently carries a Zacks Rank #3 (Hold). Some better ranked stocks in the finance space include Select Bancorp, Inc. (SLCT), Great Southern Bancorp Inc. (GSBC) and Hudson City Bancorp, Inc. (HCBK). All these stocks sport a Zacks Rank #1 (Strong Buy).
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