ACAS American Capital, Ltd.

Hercules Technology Growth Capital Inc.’s (HTGC) fourth quarter 2012 distributable net operating income (DNOI) came in at 27 cents per share, beating the Zacks Consensus Estimate of 23 cents. This also comes in line with the prior-year quarter’s DNOI of 27 cents.

For full-year 2012, DNOI came in at $1.07 per share, up 7% compared with $1.00 per share in 2011. Moreover, it surpassed the Zacks Consensus Estimate of 96 cents.

Better-than-expected quarterly results were mainly driven by improvement in total investment income. Yet, higher interest expense and loan fees along with increased operating expenses marginally subdued the results. Overall, Hercules ended the quarter with a robust performance comprising stronger credit quality and a high level of liquidity.

Performance in Detail

Hercules’ total investment income reached $27.4 million, up 29.2% from $21.2 million in the prior-year quarter. The surge resulted from higher interest income and rise in total fees. Moreover, total investment income surpassed the Zacks Consensus Estimate of $26.0 million.

For full year 2012, total investment income reached $97.5 million, up 22.1% year over year. Further, it surpassed the Zacks Consensus Estimate of $95.0 million.

Total operating expenses (excluding interest expense and loan fees) for the reported quarter was $6.9 million, surging 19.0% from $5.8 million in the year-ago period. The rise reflects higher general and administrative expenditures and higher compensation costs.

On a year-over-year basis, interest expense and loan fees in the reported quarter soared 62.7% to $7.5 million.

As of Dec 31, 2012, the weighted average cost of debt, comprising interest and fees, was 6.29% compared with 6.23% as of Dec 31, 2011.

Net investment income (before investment gains and losses) for the quarter came in at $13.1 million, up 20.7% from $10.8 million in the year-ago quarter.

Business Highlights

The fair value of Hercules’ total investment portfolio was $914.3 million as of Dec 31, 2012, rising 15.3% from $792.8 million as of Sep 30, 2012. During the quarter, the company provided approximately $200.7 million in debt and equity funding to new and existing portfolio companies.

As of Dec 31, 2012, Hercules’ net asset value was $9.75 per share compared with $9.42 as of Sep 30, 2012.

Dividend and Repurchase Update

Concurrent with the earning release, the board of directors at Hercules declared a quarterly cash dividend of 25 cents. The dividend will be paid on Mar 19 to shareholders of record as of Mar 11. This represents about 4.2% hike in the dividend from the prior quarter.

The company did not buyback shares of its common stock during the reported quarter. Further, its share repurchase program expired in Feb 2013.

Performance of Other Company in the Same Industry

American Capital, Ltd. (ACAS) reported fourth quarter 2012 operating income of 26 cents per share, beating the Zacks Consensus Estimate by a penny. The favorable outcome was attributable to top-line growth, followed by decreased operating expenses reflecting prudent expense management.

Moreover, new investments and reduction of debt acted as positives. Yet, the low-interest environment during the quarter was a negative.

Our Viewpoint

Hercules is well positioned to expand its portfolio considering its strong liquidity position. The company’s solid capital position is expected to reinforce investors’ confidence in the stock.

However, the ongoing capital market disruption and sluggish economic recovery can affect its growth. Also, the bleak economic environment might elevate the cost of funding.

Currently, Hercules retains a Zacks Rank #3 (Hold). Other stocks in the same sector that are performing well and can be considered for investment include - NewStar Financial, Inc. (NEWS) and Safeguard Scientifics, Inc. (SFE). Both these companies carry a Zacks Rank #2 (Buy).

 
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