American Capital, Ltd. ACAS reported second-quarter 2015 net operating income per share of 24 cents, beating the Zacks Consensus Estimate by a penny. Moreover, results compared favorably with the prior-year quarter earnings of 9 cents.
Better-than-expected results were driven by higher revenues. New investments and realization from portfolios were the other positives. However, higher operating expenses reflected absence of prudent expense management.
Net operating income more than doubled on a year-over-year basis to $67 million. Net earnings came in at $62 million or 22 cents per share, compared with $212 million or 76 cents per share in the prior-year quarter.
Performance in Detail
Total operating revenue was $168 million in the quarter, up 68% from the prior-year quarter. The upsurge was primarily due to higher interest and dividend income. Also, operating revenue surpassed the Zacks Consensus Estimate of $157 million.
Total interest and dividend income was $151 million, up 82% year over year. However, fee income was stable at $17 million.
Operating expenses surged 20% year over year to $71 million. The rise in expenses was primarily due to higher interest expenses and general and administrative expenses along with European Capital management fees, partially offset by lower salaries, benefits and stock-based compensation.
American Capital’s asset coverage ratio decreased to 358% in the quarter from 593% in the prior-year quarter. The company made new investments of $976 million during the quarter while strengthening its balance sheet. Notably, $300 million was invested in Senior Floating Rate Loans, $179 million in European Capital debt fund, $155 million in Structured Products, $145 million in buyback of ACE I and ACE II interests in 22 portfolio companies and $114 million in Sponsor Finance Investments.
American Capital recorded $594 million of cash proceeds from the realization of portfolio investments. This includes $170 million from European Capital's investment portfolio.
As of Jun 30, 2015, excluding European Capital loans, non-accrual loans were $109 million, representing 2.7% of total loans at fair value compared with $98 million or 2.5% as of Mar 31, 2015. Further, European Capital non-accrual loans were $28 million, representing 15.5% of total European Capital loans at fair value compared with $20 million, or 5.7% as of Mar 31, 2015.
Net asset value (NAV) per share came in at $20.35, up 1% or 23 cents per share from $20.12 as of Jun 30, 2014. The weighted average effective interest rate on the company’s debt investments excluding Senior Floating Rate Loans and European Capital's debt investments as of Jun 30, 2015 was 8.8%, down from 9.3% at the end of the prior-year quarter.
Capital Deployment
Beginning in the third quarter of 2015, American Capital's board of directors changed its share repurchase program. Under the new program, $300 million to $600 million of common stock will be bought at price per share below 85% of the company’s most recent quarterly net asset value per share, subject to some conditions. Notably, the repurchases will be made before the spin-off of American Capital Income by the company.
During the reported quarter, American Capital repurchased 6.5 million shares for $93 million at an average price of $14.32 per share. Since the initiation of the program in Aug 2011, the company has bought back 108.1 million shares for $1.3 billion, at an average price of $11.90 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.
Moreover, the completion of the split will help American Capital to focus on its core asset management business and benefit its shareholders. Such a move will make the business transparent for the investors and make the company more competitive in the market.
Though the low interest rate environment and global cues might act as headwinds in the upcoming quarters, we believe the improved portfolio performance is expected to continue with the economic recovery.
Currently, American Capital carries a Zacks Rank #2 (Buy). Other finance stocks worth considering include Hercules Technology Growth Capital, Inc. HTGC, MCG Capital Corporation MCGC and Fifth Street Finance Corp. FSC. All these stocks sport a Zacks Rank #2.
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