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Ares Capital (ARCC) Up 2% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Ares Capital (ARCC). Shares have added about 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 its most recent earnings report in order to get a better handle on the important drivers.

Ares Capital’s Q4 Earnings Revenues Beat Estimates

Ares Capital’s fourth-quarter 2018 core earnings of 45 cents per share for the quarter surpassed the Zacks Consensus Estimate of 41 cents. The bottom line increased 18.4% from the year-ago quarter.

Results reflected improved total investment income and healthy portfolio activity. Moreover, a decline in expenses was a positive for the company. However, it exited the reported quarter with lower cash and cash equivalents.

GAAP net income for the quarter under review was $153 million or 36 cents per share, down from $232 million or 54 cents per share in the prior-year quarter.

For 2018, core earnings were $1.68 per share, up from $1.39 in 2017. The figure surpassed the Zacks Consensus Estimate of $1.63. GAAP net income was $858 million or $2.01 per share, up from $667 million or $1.57 per share in 2017.

Total Investment Income Improves, Expenses Decline

Total investment income amounted to $345 million, up 12.4% year over year. The rise was driven by an increase in all income components. Moreover, the figure surpassed the Zacks Consensus Estimate of $327.2 million.

For 2018, total investment income was $1.34 billion, up from $1.16 billion recorded in the prior year. Also, the figure surpassed the Zacks Consensus Estimate of $1.32 billion.

Total expenses witnessed a year-over-year decrease of 12.8% to $150 million. The decline was due to a fall in other general and administrative expenses, and lack of professional fees and other costs related to the American Capital acquisition.

Net investment income surged 45% year over year to $203 million.

Strong Balance Sheet

As of Dec 31, 2018, the company’s cash and cash equivalents totaled $296 million, down from $316 million as of Dec 31, 2017. Total outstanding debt was $5.21 billion, up from $4.85 billion on Dec 31, 2017.

As of Dec 31, 2018, Ares Capital’s total assets amounted to $12.90 billion, up 4.4% from the Dec 31, 2017 level. Stockholders’ equity was $7.30 billion as of Dec 31, 2018, up from $7.10 billion as of Dec 31, 2017.

Further, net asset value was $17.12 per share, up from $16.65 as of Dec 31, 2017.

Portfolio Activities

New commitments worth $2.71 billion were made during the reported quarter, up from nearly $1.51 billion recorded in the prior-year quarter. The company exited $1.02 billion of commitments in the reported quarter compared with $1.32 billion in the year-ago quarter.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

Currently, Ares Capital 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 trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Ares Capital has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.


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