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On Mar 11, 2013, we reaffirmed our Neutral recommendation on Hercules Technology Growth Capital, Inc. (HTGC - Analyst Report) based on its better-than-expected results, robust capital deployment activities and huge growth prospects. However, insufficient experience, concentration risk and stringent regulatory landscape are expected to mar Hercules’ profitability in the near to medium term.

Why the Neutral Stance?

Though Hercules’ fourth-quarter results (announced on Feb 28) outpaced the Zacks Consensus Estimate, it came in line with the prior quarter’s earnings. Better-than-expected quarterly results were mainly driven by improvement in total investment income, partly offset by higher interest expense, loan fees and increased operating expenses.

Further, in the past 30 days, few estimates have moved up, resulting in only a 0.9% improvement in the Zacks Consensus Estimate for 2013. Estimates for 2014 have also improved by 2.5% over the same period. In addition, over the past four quarters, the average earnings surprise has been only 5.7% for this Zacks Rank #2 (Buy) stock.

The dividend growth story has been decent at Hercules. In Feb 2013, the company last increased its quarterly dividend by about 4.2% to 25 cents per share, thereby boosting investors’ confidence in the stock. Also, in 2012, it originated roughly $636.6 million in total debt and equity commitments to new and existing portfolio companies. The company continues to experience an increase in new investment origination activities and expects the trend to persist in the near future.

Yet, insufficient experience seems to be one of the major setbacks for Hercules. The company is comparatively a new venture, having commenced its investment operations late in 2004, and therefore has a few records to offer in support of its investment approach. Additionally, concentration risk and increased regulatory compliance are likely to thwart its growth prospects.

Other Stocks to Consider

Other stocks in the same sector that are performing well and are worth considering include American Capital, Ltd. (ACAS - Analyst Report), Golub Capital BDC, Inc (GBDC - Snapshot Report) and Main Street Capital Corporation (MAIN - Snapshot Report). American Capital and Golub Capital hold Zacks Rank #1(Strong Buy), whereas Main Street carries a Zacks Rank #2.

 

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