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Bear of the Day

Estimates have come down after disappointing second quarter results, sending ACAS to a Zacks Rank # 5 (Strong Sell), with an “Underperform” recommendation.
 
About the Company

American Capital (ACAS) is global private finance investor and alternative asset manager. Founded in 1986, the company had $21 billion in earning assets under management as of June 30, 2013. Headquartered in Bethesda, Maryland, ACAS has 8 offices and 367 employees in the U.S. and Europe.
 
The company has been able to grow its earnings AUM significantly, thanks mainly to two of its public funds, American Capital Agency and American Capital Mortgage (both mortgage REITs).
 
Disappointing Second Quarter Results

American Capital reported its second quarter operating results on July 31, 2013. Net operating income for the quarter was $0.16 per share, substantially worse than the Zacks Consensus Estimate of $0.25 per share. This was the company’s second consecutive miss. ACAS has delivered an average negative surprise of 21.6% in the last four quarters.

Total operating revenue for the quarter was $130 million, down 20% from $163 million in the prior-year quarter, due to lower interest and dividend income. Further, operating revenue was below the Zacks Consensus Estimate of $139 million.
 
Total interest and dividend income was $118 million, down 22% from the same quarter in the prior year. The weighted average effective interest rate on the company's debt investments declined 20 basis points from the end of the prior quarter to 10.4%, as of June 30, 2013.
 
Past due and non-accruing loans increased to $245 million (4.6% of total investments), from $208 million as the end of first quarter.  Interest coverage and debt service coverage ratios declined to 2.0 and 1.4 respectively from 2.2 and 1.6 at the end of the first quarter.
 
Downwards Revisions
 
Due to disappointing results, quarterly and annual estimates have been revised downwards in the past couple of months. Zacks consensus estimates for the current quarter and year are now $0.23 and $0.91 respectively down from $0.26 and $0.99 per share, 90 days ago.
 
Current consensus estimate represents 24% year-over-year earnings decline for the current year.

The Bottom Line
 
ACAS is currently Zacks Rank # 5 (Strong Sell) stock and it has a recommendation of “Underperform”.  As such investors would like to avoid this stock until there are clear signs of improvement in its performance.
 
Better Play?
 
Investors seeking exposure to the industry could look at Apollo Investment Capital (AINV) or Medallion Financial (TAXI), both are Zacks Rank #1 stocks with ‘outperform’ recommendation.
 
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