Why Is Ares Capital (ARCC) Up 18% Since Last Earnings Report?

A month has gone by since the last earnings report for Ares Capital (ARCC). Shares have added about 18% in that time frame, outperforming 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 the most recent earnings report in order to get a better handle on the important catalysts.

Ares Capital Q1 Earnings Miss on Lower Investment Income

Ares Capital’s first-quarter 2020 core earnings of 41 cents per share missed the Zacks Consensus Estimate of 43 cents. Also, the bottom line declined 14.6% year over year.

The results were adversely impacted by a decline in total investment income. However, lower expenses and decent portfolio activity acted as tailwinds.

GAAP net loss was $612 million or $1.42 per share versus GAAP net income of $214 million or 50 cents per share in the prior-year quarter.

Total Investment Income & Expenses Down

Total investment income was $369 million, down 1.1% year over year. The fall was mainly due to lower capital structuring service fees. Also, the figure lagged the Zacks Consensus Estimate of $381.8 million.

Total expenses declined 25.8% year over year to $132 million.

Net investment income grew 16.4% year over year to $234 million.

Strong Balance Sheet

As of Mar 31, 2020, the company’s cash and cash equivalents (including restricted cash) totaled $1.12 billion, up significantly from $176 million on Dec 31, 2019.

During the first quarter, the company enhanced its liquidity profile by issuing $750 million in unsecured investment grade notes at a record low coupon, increasing bank borrowing capacity by $565 million and extending the maturity on $5 billion of revolving facilities to 2025.

Moreover, Ares Capital had roughly $2.1 billion available for additional borrowings under the existing credit facilities as of March 31, 2020. Total outstanding debt was $8.18 billion, up from $6.97 billion as of Dec 31, 2019.

As of Mar 31, 2020, Ares Capital’s total assets amounted to $15.81 billion and stockholders’ equity was $6.58 billion.

Further, net asset value was $15.58 per share, down from $17.32 as of Dec 31, 2019.

Robust Portfolio Activities

Gross commitments worth $1.27 billion were made during the first quarter to 17 new and 20 existing portfolio companies. This compares with $1.95 billion worth of gross commitments in the prior-year quarter.  

Further, during the quarter, the company exited $918 million of commitments compared with $1.35 billion a year ago.

The fair value of Ares Capital’s portfolio investments as of Mar 31, 2020 was $14.4 billion, which included $13.0 billion in accruing debt and other income producing securities.

Share Repurchase Update

In March, Ares Capital repurchased nearly 8.5 million shares at an average price of $11.83 per share.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -9.19% due to these changes.

VGM Scores

Currently, Ares Capital has a subpar Growth Score of D, 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 D. 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 these revisions indicates a downward shift. It's no surprise Ares Capital has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.

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