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Analyst Blog

Hercules Technology Growth Capital, Inc.’s (HTGC - Analyst Report) second-quarter 2013 distributable net operating income (DNOI) came in at 32 cents per share, beating the Zacks Consensus Estimate of 26 cents. This also compares favorably with the year-ago DNOI of 28 cents.

Better-than-expected results were primarily driven by an improvement in total investment income, marginally offset by higher expenses. Overall, Hercules ended the quarter with an impressive performance, comprising a higher level of liquidity.

Performance in Detail

Hercules’ total investment income reached $34.5 million, up 44.4% from $23.9 million in the prior-year quarter. The surge resulted from increases in interest income and fee income. This also compares favorably with the Zacks Consensus Estimate of $32.0 million.

Total operating expenses (excluding interest expense and loan fees) for the reported quarter were $8.2 million, rising 30.2% from $6.3 million in the year-ago period. This was due to increased general and administrative expenditures and compensation costs.

On a year-over-year basis, interest expense and loan fees climbed 69.2% year over year to $8.8 million.

As of Jun 30, 2013, the weighted average cost of debt, comprising interest and fees, was 6.0% versus 6.7% as of Jun 30, 2012.

Net investment income (before investment gains and losses) for the quarter came in at $17.6 million, up 43.1% from $12.3 million in the year-ago quarter.

Business Highlights

The fair value of Hercules’ total investment portfolio was $1,041.1 million as of Jun 30, 2013, rising 7.5% from $968.0 million as of Mar 31, 2013. During the quarter, the company provided approximately $253.4 million in debt commitment to new and existing portfolio companies.

As of Jun 30, 2013, Hercules’ net asset value was $10.09 per share compared with $9.54 as of Jun 30, 2012.

Dividend Update

Along with the earning release, Hercules’ board of directors declared a quarterly cash dividend of 28 cents. The dividend will be paid on Aug 20 to shareholders of record as of Aug 13. The new dividend is about 3.7% higher than the previous payout.

Our Viewpoint

Given its solid liquidity position, Hercules is well poised to expand its portfolio. The company’s strong capital position is expected to boost investors’ confidence in the stock.

However, the uncertain economic environment might increase the cost of funding as well as limit Hercules’ growth going forward.

Currently, Hercules carries a Zacks Rank #2 (Buy). Stocks in the same sector that are worth considering include KCAP Financial, Inc. (KCAP - Snapshot Report), MCG Capital Corporation (MCGC - Snapshot Report) and Gladstone Capital Corporation (GLAD - Snapshot Report). All of these stocks have a Zacks Rank #2 (Buy).

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