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Analyst Blog

On Nov 19, 2013, we reiterated our long-term Neutral recommendation on Hercules Technology Growth Capital, Inc. (HTGC - Analyst Report). Our decision was based on the company’s improved capital deployment activities. However, rise in operating expenses and high concentration risks remain causes of concern.

Why the Neutral Stance?

Hercules’s third-quarter 2013 distributable net operating income (DNOI) surpassed the Zacks Consensus Estimate by about 46%. Better-than-expected results were largely driven by rise in total investment income, partially offset by higher expenses.

Additionally, the Zacks Consensus Estimate advanced 7.0% to $1.23 per share over the last 30 days. However, for 2014, the Zacks Consensus Estimate dropped by a penny to $1.26 per share over the same time frame. Hence, Hercules currently has a Zacks Rank #3 (Hold).

Hercules’ capital deployment activities have been impressive. Earlier this month, the company increased its quarterly cash dividend by 10.7% to 31 cents per share. This was the fourth time the payout witnessed a hike this year.

On the flip side, higher operating expenses are a concern for Hercules. Costs are expected to persistently increase in the coming quarters due to the company’s expansion of operations in Virginia and California as well the opening of an office in New York City.

Moreover, Hercules’ investment activities are primarily concentrated in the U.S. based companies. Though the American economy is recovering, an uncertain interest-rate environment and regulatory constraints may lead to increased costs of funding.

Other Banks to Consider

Some other financial stocks worth considering include Ares Capital Corporation (ARCC - Snapshot Report), BlackRock Kelso Capital Corporation (BKCC - Snapshot Report) and Gladstone Investment Corporatio (GAIN - Snapshot Report). All of these stocks carry a Zacks Rank #2 (Buy).

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