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Loan Originations Aid Hercules Capital (HTGC) Amid Cost Woes

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Hercules Capital, Inc. (HTGC - Free Report) remains well-positioned for top-line growth on expectations of increasing demand for customized financing. Moreover, backed by solid balance sheet and liquidity positions, the company’s capital deployment activities seem sustainable.

However, elevated expenses might hamper HTGC’s bottom line to an extent in the near term. Moreover, the lack of global diversification makes us apprehensive about the company’s growth prospects.

Analysts have also maintained a neutral stance toward the stock. Over the past 30 days, the Zacks Consensus Estimate for HTGC’s 2022 earnings has been unchanged. Thus, the company currently carries a Zacks Rank #3 (Hold).

So far this year, shares of Hercules Capital have lost 8.4% compared with the industry’s decline of 9%.


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Looking at fundamentals, HTGC had $430.3 million in liquidity, including $59.3 million in unrestricted cash and cash equivalents, and $370.9 million in credit facilities as of Mar 31, 2022. The company also has the availability to draw on credit facilities when required. It maintains long-term issuer ratings of BBB- and Baa3 from Fitch Ratings and Moody’s Investors Service, respectively, and a stable outlook, which renders it favorable access to the debt market.

Thus, supported by sufficient earnings strength and a solid balance sheet, the company is expected to be able to continue to meet debt obligations in the near term, even if the economic situation worsens.

Moreover, despite the tough macroeconomic scenario, Hercules Capital is expected to continue witnessing growing demand for customized financing from private equity firms and venture capitalists.

HTGC’s concentrated focus on its credit performance remains impressive. In 2021, the company closed $2.6 billion in new debt and equity commitments. In the first quarter of 2022, it reported $615.2 million in gross new debt and equity commitments. Since the end of the first quarter and as of May 2, it closed new gross debt and equity commitments worth $334.8 million.

Given a solid liquidity position, Hercules Capital is expected to keep enhancing shareholder value through efficient capital deployment activities. In order to maintain its RIC status, the company distributes approximately 90% of its taxable income. In October 2021, it announced a 3.1% hike in quarterly distribution, following a 3.2% hike in May 2019. Management plans to revisit its dividend policy at the end of every quarter and determine if any changes are required.

However, while the company’s expenses witnessed a decline in first-quarter 2022, it saw a compound annual growth rate of 9.6% over the last six years (2016-2021). The rise was mainly due to an increase in compensation costs and interest expenses. While the company’s efforts to expand originations will lead to enhanced growth prospects, it will result in elevated costs in the near term, which might put pressure on the bottom line.

To comply with regulatory requirements, Hercules Capital invests primarily in the United States-based companies and to a lesser extent in foreign names. While the U.S. economy has been improving, persistent regulatory constraints amid the current tough economic scenario may lead to increased costs of funding, and thereby limit the company’s access to the capital market.

A couple of better-ranked stocks from the same space are Gladstone Capital Corporation (GLAD - Free Report) and Main Street Capital Corporation (MAIN - Free Report) . GLAD currently sports a Zacks Rank #1 (Strong Buy), whereas MAIN carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The consensus estimate for Gladstone Capital’s current fiscal year’s earnings has been revised 8.1% upward over the past 60 days. Over the past year, GLAD’s share price has rallied 7.3%.

Main Street Capital’s current-year earnings estimates have been revised 1.4% upward over the past 60 days. MAIN’s shares have lost 7.4% over the past year.

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