ACAS American Capital, Ltd.

We have reiterated our Neutral recommendation on American Capital Ltd. (ACAS), following a detailed analysis of the company’s fundamentals in light of the current economic environment. Also, the restructuring efforts by the company have contributed to this stance.

In March 2012, American Capital announced an investment in equity in its portfolio company Halt Medical, Inc., a medical device company that focuses on women's health. The additional financing by American Capital will support Halt Medical as it grows further with the approval of Food and Drug Administration (FDA) for the surgical use and commercialization of its products in major global markets. The approval of FDA, regarding this issue, is anticipated sometime during the year 2012.

However, in February 2012, American Capital announced the divesture of its portfolio company Aptara Inc., following the divesture of another portfolio company - CIBT Solutions Inc. (CIBT) in January. We expect these restructuring initiatives to significantly reduce the operating costs of American Capital.

During first-quarter 2012, American Capital repurchased a total of 5.5 million shares of its common stock in the open market for $48 million. The average purchase price was $8.79 per share. Moreover, the company extended the program, initiated in 2011 for stock repurchases or dividend payments through December 2013.

The authorization of the new share buyback program and resumption of dividend payments raise our hopes for an enhanced investor confidence in the company.

American Capital’s successful restructuring of debt provided it with sufficient operating flexibility. In addition to this, the company continues to lessen risks from its balance sheet through a number of initiatives like repayment of debt. Moreover, new investment opportunities are expected to continue along with the economic recovery.

However, American Capital’s first-quarter 2012 operating income of 14 cents per share lagged the Zacks Consensus Estimate by 5 cents. Moreover, the results were below the prior-year quarter’s earnings of 23 cents per share. The unfavorable result was due to a fall in interest and dividend income in the quarter. Yet, decreased operating expenses partially offset the decline.

We believe American Capital’s earnings are affected by the spread between the interest rate on investments and the interest rate at which it has borrowed funds. An increase or decrease in interest rates could reduce the spread between the investment rate and the borrowing rate, thereby adversely affecting the overall profitability. An unsettled economic environment is also a cause of concern.

We believe that the risk-reward profile of American Capital is currently balanced and hence, we have reiterated our Neutral recommendation on its shares.

American Capital currently retains its Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. One of American Capital’s peers, Ares Capital Corporation (ARCC) also retains a Zacks #3 Rank.

 
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