American Capital Upped to Strong Buy

On Feb 26, Zacks Investment Research upgraded American Capital, Ltd. (ACAS - Analyst Report) to a Zacks Rank #1 (Strong Buy).

Why the Upgrade?

American Capital has been witnessing rising earnings estimates on the back of strong fourth-quarter 2012 results. Moreover, this well-known private equity and venture capital firm delivered average earnings surprise of 37.4% in the last four quarters.

American Capital reported fourth-quarter results on Feb 11. Earnings per share came in at 26 cents, beating the Zacks Consensus Estimate by a penny but significantly lower than the prior-year quarter’s earnings of 67 cents.

Better-than-expected results were attributable to top-line growth, followed by decreased operating expenses reflecting prudent expense management. Moreover, new investments and reduction of debt acted as positives. Yet, the low interest environment during the quarter was a negative.

As of Dec 31, 2012, non-accrual loans were $177 million, representing 9% of total loans at fair value, down from $252 million of non-accrual loans, indicating 12.5% of total loans at fair value, as of Sep 30, 2012. Moreover, American Capital’s asset coverage ratio improved substantially to 801% at the end of 2012 from 465% in the prior year.

The Zacks Consensus Estimate for 2013 increased 3.8% to $1.09 per share as 5 out of 9 estimates were revised higher over the last 30 days. For 2014, 1 of the 6 estimates was revised higher over the same time frame, lifting the Zacks Consensus Estimate by 0.9% to $1.15 per share.

Other Stocks to Consider

Among its peers, companies in the same industry with a Zacks Rank #1 include NewStar Financial, Inc. (NEWS - Snapshot Report) while Marlin Business Services Corp. (MRLN - Snapshot Report) and Horizon Technology Finance Corporation (HRZN - Snapshot Report) carry a Zacks Rank #2 (Buy).