American Capital
Ltd.’s (ACAS) fourth-quarter 2011 operating income of 24
cents per share outpaced the Zacks Consensus Estimate by 4 cents.
Moreover, the results outshined the prior-year quarter’s earnings
by 5 cents per share. The favorable outcome was due to a rise in
fee and interest and dividend income in the quarter.
Including deferred tax benefit of
$428 million, net operating income for the quarter was $229
million, or 67 cents per share, significantly up from $67 million
or 19 cent per share in the prior-year quarter.
For full year, net operating income
was $448 million, or $1.26 per share, significantly down from $204
million or 62 cents per share in the prior-year. Excluding deferred
tax benefit, net operating income came in at $303 million, or 85
cents per share, surpassing the Zacks Consensus Estimate by 3
cents.
Performance in
Detail
Total operating income was $160
million in the quarter, up 12% from $143 million in the prior-year
quarter, attributed to higher fee income and interest and dividend
income. Operating income also was above the Zacks Consensus
Estimate of $136 million.
For full year, total operating
income was $591 million, down 2% from $600 million in the
prior-year, attributed to lower fee income and interest and
dividend income. However, operating income outpaced the Zacks
Consensus Estimate of $564 million.
Total interest and dividend income
for the quarter was $149 million, up 12% from $133 million in the
prior-year quarter. The weighted average effective interest rate on
the company's private finance debt investments as of December 31,
2011 was 10.7%, up 40 basis points at the end of the previous
quarter and 50 basis points higher than the rate as of December 31,
2010. Fee income climbed 10% year over year to $11 million.
Operating expenses remained stable
at $76 million compared to the prior-year quarter, as decline in
interest expenses was offset by higher general and administrative
expenses.
As of December 31, 2011,
non-accrual loans were $219 million, representing 8.7% of total
loans at fair value, up from $173 million of non-accrual loans,
indicating 6.6% of total loans at fair value as of September 30,
2011.
Net asset value (NAV) per share
came in at $13.87, up 16% or $1.95 per share from NAV of $11.92 per
share as of September 30, 2011. In spite of the volatile capital
markets in the quarter, affecting valuations of investment
portfolio, the overall underlying performance of the company’s
portfolio companies continued to be positive. Management not only
anticipates an improvement in the portfolio along with an economic
recovery, but also expects to post a growth in book value.
American Capital’s asset coverage
ratio improved substantially to 465% from 364% in the prior
quarter. The company repaid debt of $1 billion and increased
investments by $300 million while strengthening its balance
sheet.
Share Repurchase and
Dividend Update
During the third and fourth
quarters of 2011, American Capital repurchased 17.6 million shares
worth $134 million, at an average price of $7.61 per share.
In the prior quarter, American
Capital adopted a new program for additional repurchases of shares
or dividend payments through December 31, 2012. To begin with the
new program, American Capital has planned to keep aside certain
amount either for stock repurchases or dividend payments,
quarterly. The quarterly amount will depend on the company’s
cumulative net cash from operating activities in the prior
quarters.
Further, cash and cash equivalents
in hand, cumulative repurchases or dividends, debt position,
investment plans and operational issues will also be the
determining factors for the quarterly amount. Last but not the
least, the current trading price of American Capital's common
stock, financial liquidity and ongoing economic conditions will
also be taken into consideration.
As per the company’s plan, if the
price of American Capital's common stock trade at a discount to the
net asset value of shares, the company will opt for share
repurchase. On the flip side, if the price of American Capital's
common stock trade at a premium to the net asset value of shares,
the company will opt for dividend payments.
The authorization of the new share
buyback program and resumption of dividend payments raise our hopes
for enhanced investor confidence.
Our Take
Among American Capital’s peers,
Fortress Investment Group LLC (FIG) and
Ares Capital Corporation (ARCC), are scheduled to
release their earnings for the fourth quarter of 2011 on February
28, 2012.
Recently, in January 2012, American
Capital announced the divesture of its portfolio company CIBT
Solutions Inc. (CIBT). The unit was acquired by ABRY Partners in
mid-December 2011 for $215 million. The company has earned 15%
compounded annual rate of return over the life of its total debt
and equity investments, including interest, dividends fees and
expected escrow proceeds.
During the quarter, American
Capital announced an investment of $10 million in order to support
RBC Capital Markets Corp.’s syndication of $75 million Second Lien
Term Loan financing. The loan financing will facilitate Permira
Advisors LLC to acquire Renaissance Learning Inc. Further,
the company announced its plan to invest $15 million to support BMO
Capital Markets' syndication of $100 million Second Lien Term Loan
financing. The loan financing will help Teachers' Private Capital
to purchase the majority stake of Flexera Software Inc.
American Capital has the capability
to provide flexible financing solutions ranging from a variety of
senior debt and uni-tranche to mezzanine and equity co-investments.
Further, the company provides multi-currency funding with
underwriting platform globally while boosting growth of portfolio
companies. Such benefits provided by American Capital urge private
equity clients to consider it as an investment partner, which in
turn, helps in the company’s growth.
American Capital’s successful
restructuring of debt provided it with sufficient operating
flexibility and the company also continues to derisk its balance
sheet through a number of initiatives including repayment of debt.
However, we believe limited accessibility to capital and increased
funding costs have weakened the company’s strategic position in its
sector. Moreover, the improved portfolio performance is expected to
continue along with the economic recovery.
American Capital currently retains
its Zacks #3 Rank, which translates into a short-term (1−3 months)
‘Hold’ rating. Considering the fundamentals, we are also
maintaining a “Neutral” recommendation on the stock.
AMER CAP LTD (ACAS): Free Stock Analysis Report
ARES CAP CP (ARCC): Free Stock Analysis Report
FORTRESS INVEST (FIG): Free Stock Analysis Report
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Zacks Investment Research
American Capital Strategies (NASDAQ:ACAS)
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