Ares Capital Shares Fall on Earnings Miss & Higher Expenses

Shares of Ares Capital Corporation ARCC dipped 1.4% following its second quarter 2014 earnings release before the opening bell on Tuesday. Core earnings came in at 34 cents per share, down 10.5% from the year-ago quarter. Moreover, the figure missed the Zacks Consensus Estimate of 37 cents.

Results were hampered by a fall in net investment income driven by mounting expenses. However, rise in new investment commitments and a steady balance sheet position were the positives in the quarter.

GAAP net income totaled $142.8 million, up 7% from the prior-year quarter.

Details

Ares Capital's total investment income summed $224.9 million, up 9.1% year over year. The rise was driven by an increase in all the components excluding capital structuring service fees. However, the figure lagged the Zacks Consensus Estimate of $236.0 million.

Total operating expenses rose 19.7% year over year to $130.0 million. This was due to a rise in all the elements of expenses.

Net investment income declined 1.7% year over year to $92.0 million.

As of Jun 30, 2014, cash and cash equivalents came in at $223.2 million. Total debt outstanding was $3.4 billion. Further, the company has $1.8 billion available for additional borrowing as per its present credit facility.

In July, Ares Capital completed a public equity offering. Net proceeds of around $257.7 million from the same were used to reimburse certain debts accumulated under its debt services and for general business purposes.

Notably, loans on non-accrual status represented 1.9% of total investments at amortized cost for the quarter.

Business Transactions

While there were new investment commitments worth $1,018.9 million, Ares Capital exited $767.3 million worth of commitments in the reported quarter. Further, from Jul 1 to Jul 31, additional new investment commitments of $492.0 million were made. However, it exited commitments worth $102.0 million during the same time frame.

As of Jun 30, 2014, Ares Capital's total assets amounted to $8.6 billion compared with $7.1 billion as of Jun 30, 2013. Stockholders' equity totaled $4.9 billion and net asset value came in at $16.52 per share as of Jun 30, 2014, up 13.5% and 1.9% respectively from the year-ago quarter.

Our Viewpoint

Though Ares Capital's second-quarter earnings were disappointing, a stable rise in investment commitments is expected to enhance top line growth in the impending quarters. Moreover, the company may continue to enhance its portfolio given its solid liquidity position.

However, the company's failure to control expenses is a matter of concern. Also, intensifying competition and the prevailing uncertain economic scenario may keep the company's fundamentals under pressure.

Currently, Ares Capital carries a Zacks Rank #3 (Hold). Some better-ranked financial organizations include Fifth Street Senior Floating Rate Corp. FSFR, New Mountain Finance Corporation NMFC and Hercules Technology Growth Capital, Inc. HTGC. All three stocks hold a Zacks Rank #2 (Buy).