It has been about a month since the last earnings report for Ares Capital (ARCC - Free Report) . Shares have lost about 1.3% 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 its most recent earnings report in order to get a better handle on the important catalysts.
Ares Capital Q3 Earnings Beat Estimates, Expenses Rise
Ares Capital’s third-quarter 2018 core earnings of 45 cents per share surpassed the Zacks Consensus Estimate of 40 cents. The bottom line increased 25% 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 was $209 million or 49 cents per share, up from $139 million or 33 cents per share in the prior-year quarter.
Total Investment Income Improves, Expenses Rise
Total investment income amounted to $342 million, up 16.3% year over year. The rise was driven by an increase in all income components. Moreover, the figure surpassed the Zacks Consensus Estimate of $322.7 million.
Total expenses witnessed a year-over-year increase of 10.3% to $161 million. The increase was due to rise in almost all expense components except for other general and administrative expenses, and professional fees and other costs related to the acquisition of American Capital.
Net investment income surged 20.9% year over year to $185 million.
Strong Balance Sheet
As of Sep 30, 2018, the company’s cash and cash equivalents totaled $799 million, up from $316 million as of Dec 31, 2017. Total outstanding debt was $4.5 billion, slightly down from $4.9 billion on Dec 31, 2017.
As of Sep 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 Sep 30, 2018, up from $7.1 billion as of Dec 31, 2017.
Further, net asset value was $17.16 per share, up from $16.65 as of Dec 31, 2017.
New commitments worth $1.9 billion were made during the reported quarter, up from nearly $1.5 billion recorded in the prior-year quarter. The company exited $1.9 billion of commitments in the reported quarter compared with $1.6 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.
Currently, Ares Capital has a poor Growth Score of F, however its Momentum Score is doing a lot better with an A. However, the stock was allocated a grade of F on the value side, putting it in the fifth 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.
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.