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Why Is Ares Capital (ARCC) Down 1.2% Since Last Earnings Report?

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It has been about a month since the last earnings report for Ares Capital (ARCC - Free Report) . Shares have lost about 1.2% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Ares Capital due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Ares Capital Q2 Earnings & Revenues Beat, Expenses Stable Y/Y

Ares Capital’s second-quarter 2020 core earnings of 39 cents per share beat the Zacks Consensus Estimate by a penny. However, the bottom line declined 20.4% year over year.

The results benefited from stable expenses and decent portfolio activity. Further, the company’s liquidity position remained strong during the quarter. However, a decline in total investment income was an undermining factor.

GAAP net income was $277 million or 65 cents per share, up from $200 million or 47 cents per share in the prior-year quarter.

Total Investment Income Down, Expenses Stable

Total investment income was $350 million, down 8.4% year over year. The fall was mainly due to lower capital structuring service fees and interest income from investments. Nonetheless, the figure marginally surpassed the Zacks Consensus Estimate of $349 million.

Total expenses were $180 million, on par with the prior-year level.

Net investment income declined 20.7% year over year to $165 million.

Strong Balance Sheet

As of Jun 30, 2020, the company’s cash and cash equivalents (including restricted cash) totaled $301 million, up significantly from $176 million on Dec 31, 2019.

Moreover, Ares Capital had roughly $3.2 billion available for additional borrowings under the existing credit facilities as of Jun 30, 2020. Total outstanding debt was $7.40 billion, up from $6.97 billion as of Dec 31, 2019.

As of Jun 30, 2020, Ares Capital’s total assets amounted to $14.52 billion and stockholders’ equity was $6.69 billion.

Further, net asset value was $15.83 per share, down from $17.32 as of Dec 31, 2019.

Decent Portfolio Activities

Gross commitments worth $867 million were made during the second quarter to five new and 17 existing portfolio companies. This compares with $1.31 billion worth of gross commitments in the prior-year quarter.

Further, during the quarter, the company exited $1.48 billion of commitments compared with $1.35 billion a year ago.

The fair value of Ares Capital’s portfolio investments as of Jun 30, 2020 was $13.8 billion, which included $12.3 billion in accruing debt and other income producing securities.

How Have Estimates Been Moving Since Then?

It turns out, estimates review flatlined during the past month.

VGM Scores

At this time, Ares Capital has a poor Growth Score of F, however its Momentum Score is doing a lot better with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Ares Capital has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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