ACAS American Capital, Ltd.

Hercules Technology Growth Capital Inc.’s (HTGC) third-quarter 2012 distributable net operating income (DNOI) came in at 26 cents per share, modestly beating the Zacks Consensus Estimate of 23 cents. This also compares favorably with the prior-year quarter’s DNOI of 22 cents.

Results in the quarter benefited from an impressive growth in total investment income, partially offset by substantially higher interest expense and loan fees along with increased operating expenses. Overall, Hercules ended the quarter on a spirited note with stronger credit quality and high level of liquidity.

Quarter in Detail

Hercules’ total investment income came in at $23.9 million, up 27.9% from $18.7 million in the prior-year quarter. The surge resulted from substantially higher interest income. Moreover, total investment income was slightly below the Zacks Consensus Estimate of $24.0 million by 0.4%.

Total operating expenses (excluding interest expense and loan fees) were $6.5 million, up 11.6% from $5.8 million in the year-ago quarter. The rise reflects higher general and administrative expenditure, partly offset by lower employee compensation costs.

On a year-over-year basis, interest expense and loan fees in the reported quarter soared 41.7% to $6.1 million.

As of September 30, 2012, the weighted average cost of debt, comprising interest and fees, was 6.7% compared with 6.5% as of September 30, 2011.

Net investment income (before investment gains and losses) for the quarter came in at $11.4 million, up 32.1% from $8.6 million in the year-ago quarter.

Business Highlights

The fair value of Hercules’ total investment portfolio was nearly $792.8 million as of September 30, 2012, up 6.6% from $743.7 million as of June 30, 2012. During the quarter, the company provided approximately $136.4 million in debt and equity funding to new and existing portfolio companies.

As of September 30, 2012, Hercules’ net asset value was $9.42 per share compared with $9.54 as of June 30, 2012.

Dividend and Repurchase Update

Concurrent with the earning release, the Board of Directors at Hercules declared a quarterly cash dividend of 24 cents. The dividend is to be paid on November 21, 2012 to shareholders of record as of November 14.

The company did not buyback shares of its common stock during the reported quarter. However, in July 2012, the Board of Directors approved the extension of the company’s share repurchase program through February 2013.

Peer Performance

On October 29, 2012, American Capital, Ltd. (ACAS) reported third quarter 2012 operating income of 22 cents per share, lagging the Zacks Consensus Estimate by a penny. However, the results compared favorably with the prior-year quarter’s earnings of 19 cents per share.

The favorable outcome was attributable to top-line growth, followed by decreased operating expenses, reflecting better expense management. Moreover, new investments and reduction of debt acted as positives. Yet, increase in non-accrual loans was a negative for the quarter.

Our Viewpoint

Hercules is well poised to expand its portfolio, given its strong liquidity position. Additionally, we believe that the company will continue to gain from the increased market demand for venture capital investments. Further, its strong capital position will continue to reinforce investors’ confidence in the stock.

In spite of these positives, the ongoing capital market disruption and sluggish economic recovery make us apprehensive. We also remain wary of Hercules’ investment and credit management strategies. Moreover, the slow economic recovery may increase the cost of funding.

Currently, Hercules retains a Zacks #4 Rank, which translates into a short-term Sell rating.
 

 
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