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Why Is Hercules Tech (HTGC) Up 2% Since Last Earnings Report?

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A month has gone by since the last earnings report for Hercules Technology (HTGC - Free Report) . Shares have added about 2% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Hercules Tech due for a pullback? 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 drivers.

Hercules Capital’s Q2 Earnings Beat on Higher Revenues

Hercules Capital’s second-quarter 2019 net investment income of 36 cents per share outpaced the Zacks Consensus Estimate of 33 cents. The bottom line also was 38.5% above the year-ago figure.

Results benefited from higher total investment income, increase in net asset value and growth in investment portfolio. However, rise in operating expenses acted as a headwind.

Distributional net operating income came in at $39.1 million or 40 cents per share, up from $25.6 million or 29 cents per share in the prior-year quarter.

Total Investment Income Improves, Expenses Rise

Total investment income was $69.3 million, up 39.8% from the year-ago quarter. The upside was mainly driven by a higher average debt investment balance and rise in income from acceleration from early loan repayments. The top line beat the Zacks Consensus Estimate of $62.5 million.

Total operating expenses jumped 26.9% year over year to $34 million. The increase was mainly due to higher interest expenses, general and administrative costs, and total employee-compensation costs.

Total Portfolio Value & New Commitments

The fair value of Hercules Capital’s total investment portfolio was $2.3 billion as of Jun 30, 2019.

In the reported quarter, the company provided $534.8 million in new debt and equity commitments.

Balance Sheet Position

As of Jun 30, 2019, Hercules Capital’s net asset value was $10.59 per share compared with $10.26 on Mar 31, 2019.

The company had $194.9 million in liquidity, including $13.3 million in unrestricted cash and cash equivalents and $181.6 million in credit facilities, as of Jun 30, 2019.

At the end of the second quarter, the weighted average cost of debt comprising interest and fees was 5.2%, down from 6.4% from the prior-year quarter end.

Outlook

Assuming market conditions remain favorable, the company anticipates a very healthy pipeline of portfolio company IPOs for the remainder of 2019 and M&A exit activity in its portfolio to continue at a steady pace.

The company expects $100 million in prepayment activity in each of the remaining quarters of 2019.

Portfolio growth is anticipated to be between $300 million and $400 million in 2019. The company expects total new commitments for 2019 to exceed 2018 level of $1.2 billion.

For 2019, Hercules Capital expects core yields to be between 12% and 13%.

For the remainder of the year, SG&A expenses are expected to decrease from second-quarter 2019 level. For the third quarter, the same is projected to be in the range of $16-$17 million.

Given the lower expected activity in the third quarter, borrowing cost is projected to remain reasonably on par sequentially.

Return on equity (ROE) is anticipated to increase as the company continues to modestly raise leverage to its portfolio.

The company expects to maintain leverage at 125x in 2019 (driven by the expectation of early prepayments and increase in normal amortization) and intends to increase the same in 2020 if market conditions remain favorable.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, Hercules Tech has a poor Growth Score of F, however its Momentum Score is doing a lot better with a B. 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.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision has been net zero. Notably, Hercules Tech has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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