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Rising Demand for Customized Financing Aids Ares Capital (ARCC)
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Ares Capital Corporation (ARCC - Free Report) is expected to continue witnessing growth in total investment income, driven by the rise in demand for customized financing. Also, the company's steady capital deployment activities will likely help in enhancing shareholder value.
The Zacks Consensus Estimate for the company’s current-year earnings has been revised 6.2% higher over the past 30 days. This reflects that analysts are optimistic regarding its earnings growth potential. Thus, ARCC currently carries a Zacks Rank #2 (Buy).
In the past six months, shares of the company have gained 5.2% against the industry’s decline of 2.3%.
Image Source: Zacks Investment Research
Coming to its fundamentals, while Ares Capital’s total investment income declined in 2020, it recorded a five-year (2017-2021) compound annual growth rate (CAGR) of 11.9%. The increase was primarily driven by the acquisition of American Capital, which boosted investment income substantially. The uptrend in total investment income continued in the first nine months of 2022. Growth in investment income is expected to continue in the quarters ahead, given the regulatory changes and rising demand for customized financing.
ARCC is currently a small participant in a market with huge growth prospects. We are encouraged by the company’s concentrated focus on its credit performance. In 2021, 2020 and 2019, the company originated $15.6 billion, $6.7 billion and $7.3 billion of gross investment commitments to new and existing portfolio companies.
In the first nine months of 2022, Ares Capital originated $7.3 billion of gross investment commitments. From the end of the third quarter through Oct 20, the company made new investment commitments worth $1.1 billion to new and existing portfolio companies.
As of Sep 30, 2022, Ares Capital had debt of $11.8 billion, significantly higher than cash and cash equivalents (including restricted cash) of $362 million. Nevertheless, the company has a revolving credit facility, allowing it to borrow up to $4.8 billion at any time, with a maturity date of Mar 31, 2027. Thus, ARCC is expected to be able to continue meeting debt obligations in the near term, even if the economic situation worsens.
Further, the company’s capital deployment policy seems impressive. In October 2022, it announced a dividend hike of 11.6%, which followed a 2.4% hike in July, a 2.4% hike in February, a 2.5% hike in July 2021 and a 2.6% hike in February 2019. Also, the company has a share repurchase program worth $500 million in place, which will expire on Feb 15, 2023. As of Sep 30, 2022, the entire repurchase authorization remained available. Given its earnings strength, the company is expected to be able to sustain efficient capital deployment plans and, hence, continue to enhance shareholder value.
However, elevated expenses (mainly owing to the company's expansion strategy) are expected to hurt the bottom line to an extent in the near term. While the company’s expansion plans are expected to lead to enhanced growth prospects, the same might negatively impact profits. Further, regulatory headwinds make us apprehensive about ARCC’s growth prospects.
Other Stocks Worth a Look
A couple of other top-ranked stocks from the same space are Main Street Capital (MAIN - Free Report) and Gladstone Investment Corporation (GAIN - Free Report) .
The Zacks Consensus Estimate for Main Street Capital’s current-year earnings has moved 6.3% higher over the past 30 days. The company’s shares have gained 9% in the past month. Currently, MAIN sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Gladstone Investment also sports a Zacks Rank #1 at present. The company’s earnings estimates for the current fiscal year have been revised 21.5% upward over the past 30 days. In the past month, GAIN’s shares have rallied 12.6%.
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Rising Demand for Customized Financing Aids Ares Capital (ARCC)
Ares Capital Corporation (ARCC - Free Report) is expected to continue witnessing growth in total investment income, driven by the rise in demand for customized financing. Also, the company's steady capital deployment activities will likely help in enhancing shareholder value.
The Zacks Consensus Estimate for the company’s current-year earnings has been revised 6.2% higher over the past 30 days. This reflects that analysts are optimistic regarding its earnings growth potential. Thus, ARCC currently carries a Zacks Rank #2 (Buy).
In the past six months, shares of the company have gained 5.2% against the industry’s decline of 2.3%.
Image Source: Zacks Investment Research
Coming to its fundamentals, while Ares Capital’s total investment income declined in 2020, it recorded a five-year (2017-2021) compound annual growth rate (CAGR) of 11.9%. The increase was primarily driven by the acquisition of American Capital, which boosted investment income substantially. The uptrend in total investment income continued in the first nine months of 2022. Growth in investment income is expected to continue in the quarters ahead, given the regulatory changes and rising demand for customized financing.
ARCC is currently a small participant in a market with huge growth prospects. We are encouraged by the company’s concentrated focus on its credit performance. In 2021, 2020 and 2019, the company originated $15.6 billion, $6.7 billion and $7.3 billion of gross investment commitments to new and existing portfolio companies.
In the first nine months of 2022, Ares Capital originated $7.3 billion of gross investment commitments. From the end of the third quarter through Oct 20, the company made new investment commitments worth $1.1 billion to new and existing portfolio companies.
As of Sep 30, 2022, Ares Capital had debt of $11.8 billion, significantly higher than cash and cash equivalents (including restricted cash) of $362 million. Nevertheless, the company has a revolving credit facility, allowing it to borrow up to $4.8 billion at any time, with a maturity date of Mar 31, 2027. Thus, ARCC is expected to be able to continue meeting debt obligations in the near term, even if the economic situation worsens.
Further, the company’s capital deployment policy seems impressive. In October 2022, it announced a dividend hike of 11.6%, which followed a 2.4% hike in July, a 2.4% hike in February, a 2.5% hike in July 2021 and a 2.6% hike in February 2019. Also, the company has a share repurchase program worth $500 million in place, which will expire on Feb 15, 2023. As of Sep 30, 2022, the entire repurchase authorization remained available. Given its earnings strength, the company is expected to be able to sustain efficient capital deployment plans and, hence, continue to enhance shareholder value.
However, elevated expenses (mainly owing to the company's expansion strategy) are expected to hurt the bottom line to an extent in the near term. While the company’s expansion plans are expected to lead to enhanced growth prospects, the same might negatively impact profits. Further, regulatory headwinds make us apprehensive about ARCC’s growth prospects.
Other Stocks Worth a Look
A couple of other top-ranked stocks from the same space are Main Street Capital (MAIN - Free Report) and Gladstone Investment Corporation (GAIN - Free Report) .
The Zacks Consensus Estimate for Main Street Capital’s current-year earnings has moved 6.3% higher over the past 30 days. The company’s shares have gained 9% in the past month. Currently, MAIN sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Gladstone Investment also sports a Zacks Rank #1 at present. The company’s earnings estimates for the current fiscal year have been revised 21.5% upward over the past 30 days. In the past month, GAIN’s shares have rallied 12.6%.