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American Capital Ltd.’s (ACAS - Analyst Report) first-quarter 2011 operating income of 23 cents per share surpassed the Zacks Consensus Estimate by 5 cents. The results were also ahead of the prior-year quarter’s earnings of 17 cents per share. The favorable outcome was due to a drop in operating expenses, though partially offset by a decline in interest and dividend income in the reported quarter.
Net earnings for the quarter were $434 million, or $1.21 per share, significantly up from $187 million or 65 cents per share in the prior-year quarter.
Performance in Detail
Total interest and dividend income for the quarter was $146 million, down 3% from $150 million in the prior-year quarter. The weighted average effective interest rate on the company's private finance debt investments as of March 31, 2011 was 10.3%, up 10 basis points at the end of the previous quarter. Fee income was down 7% year over year to $13 million.
In the first quarter of 2011, total operating income was $159 million, down 3% from $164 million in the prior-year quarter, attributed to lower fee income and interest and dividend income. Operating income was above the Zacks Consensus Estimate of $141 million.
Operating expenses decreased 34% year over year to $76 million in the quarter, attributable to a decline in interest expenses, general and administrative expenses, and debt refinancing costs, partly offset by higher salaries, benefits and stock-based compensation expenses. Net realized investment loss was $3 million for the quarter compared with a loss of $126 million in the prior-year quarter.
As of March 31, 2011, non-accrual loans were $227 million, representing 7.7% of total loans at fair value, down from $239 million of non-accrual loans, representing 7.8% of total loans at fair value as of December 31, 2010.
As of March 31, 2011, net asset value (NAV) per share came in at $11.97, up 12% or $1.26 per share from NAV per share of $10.71 as of December 31, 2010. Annualized return on equity in the reported quarter was 44.6%. Management expects an improvement in the portfolio along with an economic recovery and thereby posts a growth in book value.
American Capital’s asset coverage ratio increased to 336% from 262% in the prior quarter. The company repaid an additional $517 million in debt, including $300 million of secured debt due 2013 during the reported quarter.
Major competitor of American Capital, Ares Capital Corporation (ARCC - Snapshot Report) also reported first-quarter 2011 earnings of 31 cents per share, outpacing the prior-year quarter earnings by 3 cents.
Another peer Fortress Investment Group LLC (FIG - Snapshot Report) is scheduled to release its earnings for the first quarter of 2011 on May 5.
American Capital’s successful restructuring of debt provided it with sufficient operating flexibility and the company also continues to derisk its balance sheet through a number of initiatives including repayment of debt. However, we believe limited accessibility to capital and increased funding costs have weakened the company’s strategic position in its sector. The resumption of dividend payments is not expected in the near term, given projections for capital losses. Moreover, the improved credit quality of the portfolio is expected to continue with the economy recovery.
American Capital currently retains its Zacks #3 Rank, which translates into a short-term (1−3 months) “Hold” rating. Moreover, considering the fundamentals, we hold a long-term (6+ months) “Neutral” recommendation on the stock.