A month has gone by since the last earnings report for Ares Capital (ARCC - Free Report) . Shares have added about 1.2% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Ares Capital due for a pullback? 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 Posts In-Line Q2 Earnings, Expenses Increase
Ares Capital’s second-quarter 2018 core earnings of 39 cents per share were in-line with the Zacks Consensus Estimate. The bottom line increased 14.7% from the year-ago quarter.
Results reflected improved total investment income and healthy portfolio activity. Moreover, the company exited the reported quarter with higher cash and cash equivalents. However, an increase in expenses was the undermining factor.
GAAP net income for the reported quarter totaled $254 million or 60 cents per share, up from $178 million or 42 cents per share in the prior-year quarter.
Total Investment Income Improves, Expenses Rise
Total investment income amounted to $333 million, up 44.2% year over year. The rise was driven by higher interest income from investments and an increase in dividend income as well as other income. Also, the figure surpassed the Zacks Consensus Estimate of $322.1 million.
Total expenses witnessed year-over-year rise of 7.4% to $175 million. The increase was due to rise in almost all expense components except for other general and administrative expenses.
Net investment income surged 30.6% year over year to $162 million.
Strong Balance Sheet
As of Jun 30, 2018, the company’s cash and cash equivalents totaled $509 million, up from $316 million as of Dec 31, 2017. Total outstanding debt was $4.6 billion, slightly down from $4.9 billion on Dec 31, 2017.
Further, the company had $3.1 billion available for additional borrowings per its present credit facility.
As of Jun 30, 2018, Ares Capital’s total assets amounted to $12.3 billion, marginally down from the Dec 31, 2017 level. Stockholders’ equity was $7.3 billion as of Jun 30, 2018, up from $7.1 billion as of Dec 31, 2017.
Further, net asset value was $17.05 per share, up from $16.65 as of Dec 31, 2017.
New commitments worth $1.6 billion were made during the reported quarter, down from nearly $2 billion recorded in the prior-year quarter. The company exited $2.2 billion of commitments in the reported quarter compared with $1.8 billion in the year-ago quarter.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
At this time, Ares Capital has a subpar Growth Score of D, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of F on the value side, putting it in the bottom 20% quintile 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.
Our style scores indicate investors will probably be better served looking elsewhere.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Ares Capital has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.