American Capital Ltd.’s (ACAS) fourth-quarter 2010 operating income of 19 cents per share surpassed the Zacks Consensus Estimate by 2 cents. The results were also ahead of the prior-year quarter’s earnings of 7 cents per share. The favorable outcome was due to a drop in operating expenses, though partially offset by a decline in interest and dividend income in the reported quarter.
For fiscal 2010, operating income of 62 cents per share outpaced the Zacks Consensus Estimate of 60 cents. The results were also ahead of the prior-year’s earnings of 56 cents per share.
Net earnings for the quarter were $381 million, or $1.08 per share, significantly up from $107 million or 38 cents per share in the prior-year quarter. For fiscal 2010, net income was $998 million, or $3.02 per diluted share compared with a net loss of $910 million or $3.77 per share in the prior year.
Performance in Detail
Total interest and dividend income for the quarter was $133 million, down 15% from $156 million in the prior-year quarter. The weighted average effective interest rate on the company’s private finance debt investments as of December 31, 2010 was 10.2%, up 20 basis points from the rate at the end of the previous quarter and 30 basis points higher than the rate at the year end 2009. Fee income was also down 23% year over year to $10 million.
For fiscal 2010, interest and dividend income was $546 million, down 14% from the prior year. Fee income was $54 million, down 8% year over year.
In the fourth quarter of 2010, total operating income was $143 million, down 15% from $169 million in the prior-year quarter, attributed to lower fee income and interest and dividend income. Operating income was above the Zacks Consensus Estimate of $142 million. For fiscal 2010, total operating income was $600 million, down 14% from $697 million in the prior year. However, operating income surpassed the Zacks Consensus Estimate of $599 million.
Operating expenses decreased 53% year over year to $76 million in the quarter. attributable to a decline in interest expenses, general and administrative expenses, salaries, benefits and stock-based compensation expenses and debt refinancing costs. Net realized investment loss was $62 million for the quarter compared with a loss of $302 million in the prior-year quarter.
For fiscal 2010, operating expenses decreased 32% year over year to $396 million, driven by a decline in interest expenses, general and administrative expenses, salaries, benefits and stock-based compensation expenses, partially offset by increased debt refinancing costs. Net realized investment loss came in at $576 million compared with a loss of $825 million in the prior year.
As of December 31, 2010, non-accrual loans were $239 million, representing 7.8% of total loans at fair value, down from $265 million of non-accrual loans, representing 7.8% of total loans at fair value as of September 30, 2010.
As of December 31, 2010, net asset value (NAV) per share was $10.71, up 12% or $1.12 per share from NAV per share of $9.59 as of September 30, 2010. Annualized return on equity in the reported quarter was 44%. Management expects an improvement in the portfolio along with an economic recovery and thereby posts a growth in book value.
American Capital’s asset coverage ratio increased to 262% from 230% in the prior quarter. The company repaid $258 million in debt during the reported quarter, and $1,881 million in full-year 2010. Further, American Capital expects to reduce secured debt due in 2013 by repaying another $150 million in the first quarter of 2011.
Major competitors of American Capital, Ares Capital Corporation (ARCC) and Fortress Investment Group LLC (FIG), are scheduled to release its earnings for the fourth quarter of 2010 on March 1.
Our Take
American Capital’s successful restructuring of $2.4 billion of debt in June provided it with sufficient operating flexibility and prevents it from filing for bankruptcy, which management had earlier cautioned about. Further, the company also continues to derisk its balance sheet through a number of initiatives including repayment of debt. However, we believe limited accessibility to capital and increased funding costs have weakened the company’s strategic position in its sector.
American Capital currently retains its Zacks #2 Rank, which translates into a short-term (1−3 months) “Buy” rating. However, considering the fundamentals, we have a “Neutral” recommendation on the stock for the long term (6+ months).
AMER CAP LTD (ACAS): Free Stock Analysis Report
ARES CAP CP (ARCC): Free Stock Analysis Report
FORTRESS INVEST (FIG): Free Stock Analysis Report
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