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On Apr 6, Zacks Investment Research upgraded American Capital Ltd. (ACAS - Analyst Report) to a Zacks Rank #1 (Strong Buy).

Why the Upgrade?

Better-than-expected fourth-quarter results, improving credit quality and enhanced asset coverage ratio are the primary rank drivers for this stock. Moreover, this well-known private equity and venture capital firm delivered an 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.

Positive 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.

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.

Moreover, American Capital is expected to announce its first-quarter 2013 results on Apr 29. The Zacks Consensus Estimate for the quarter is 28 cents per share. The Zacks Earnings ESP (Read: Zacks Earnings ESP: A Better Method) for the company is +21.4% for the first quarter. This, along with its Zacks Rank #1 (Strong Buy), make us confident regarding a positive earnings surprise call.

Other Stocks to Consider

Among peers of American Capital, NewStar Financial, Inc. (NEWS - Snapshot Report), KCAP Financial Inc. (KCAP - Snapshot Report) and Medallion Financial Corp. (TAXI - Snapshot Report) carry a Zacks Rank #2 (Buy).

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