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Ares Capital's (ARCC) Q3 Earnings Beat on Lower Expenses

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Ares Capital Corporation ARCC reported a positive earnings surprise of 13.2% for third-quarter 2016. Core earnings of 43 cents per share surpassed the Zacks Consensus Estimate of 38 cents. Moreover, earnings increased 4.9% from the year-ago quarter.

Better-than-expected results were primarily driven by a decline in operating expenses and a well-performing portfolio. Further, an increase in net investment income added to the positives. However, lower revenues remained the downside.

GAAP net income totaled $110.2 million or 35 cents per share, down from $116.9 million or 37 cents in the prior-year quarter.

Revenues and Expenses Decline

Ares Capital’s total investment income amounted to $258.7 million, down 0.9% year over year. The fall was mainly due to a reduction in interest income from investments, and management and other fees. However, the figure surpassed the Zacks Consensus Estimate of $246.1 million.

Total operating expenses declined 9.4% year over year to $117.4 million. The fall was primarily caused by lower interest and credit facility fees, administrative fees and other general and administrative fees.

Net investment income increased 5.5% year over year to $137.7 million.

Strong Balance Sheet     

As of Sep 30, 2016, the company’s cash and cash equivalents totaled $125.1 million, down from $257.1 million as of Dec 31, 2015. Total outstanding debt was $3.7 billion, down from $4.1 billion as of Dec 31, 2015. Further, the company had $1.5 billion available for additional borrowings per its present credit facility.

As of Sep 30, 2016, Ares Capital’s total assets amounted to $9.1 billion, down from $9.5 billion as of Dec 31, 2015. However, stockholders’ equity was $5.2 billion as of Sep 30, 2016, slightly up from the figure reported on Dec 31, 2015.

Further, net asset value was $16.59 per share, up from $16.46 as of Dec 31, 2015.

Notably, loans on non-accrual status represented 2.3% of total investment at an amortized cost for the reported quarter.

Portfolio Activities

New commitments worth $1529.1 million were made during the quarter, up from $1523.9 million recorded in the prior-year quarter. Ares Capital exited $1499.2 million of commitments in the quarter compared with $1340.5 million in the year-ago quarter.

Our Take

The company’s declining investment income is likely to put pressure on its bottom line, going forward. Also, intensifying competition may pose a concern for the company. However, it is expected to continue enhancing its portfolio, backed by a solid liquidity position.

ARES CAP CP Price, Consensus and EPS Surprise

ARES CAP CP Price, Consensus and EPS Surprise | ARES CAP CP Quote

Currently, Ares Capital holds a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Among other companies in the same space, FS Investment Corporation FSIC and Garrison Capital Inc. are both scheduled to report their Sep-end quarter results on Nov 9, while Fifth Street Asset Management Inc. FSAM is slated to report on Nov 14.

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