Ares Capital (ARCC) Down 25.7% Since Last Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for Ares Capital (ARCC). Shares have lost about 25.7% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Ares Capital due for a breakout? 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 Q4 Earnings Meet Estimates, Expenses Rise

Ares Capital’s fourth-quarter 2019 core earnings of 45 cents per share met the Zacks Consensus Estimate and were on par with the year-ago quarter figure.

Results reflected improvement in total investment income and decent portfolio activity. However, higher expenses hurt results to some extent. Also, Ares Capital exited the quarter with higher debt level.

GAAP net income was $204 million or 48 cents per share, up from $153 million or 36 cents per share in the prior-year quarter.

In 2019, core earnings per share of $1.89 lagged the consensus estimate by a penny but improved 12.5% year over year. GAAP net income was $793 million or $1.86 per share, down from $858 million or $2.01 per share in 2018.

Total Investment Income & Expenses Rise

Total investment income in the quarter was $386 million, up 11.9% year over year. The rise reflected an increase in interest income from investments and dividend income. However, the figure lagged the Zacks Consensus Estimate of $393.2 million.

In 2019, total investment income grew 14.3% to $1.53 billion. The figure was relatively in line with the consensus estimate.

Total expenses jumped 28.7% year over year to $193 million. The increase was primarily due to rise in almost all expense components.

Net investment income declined 6.4% year over year to $193 million.

Strong Balance Sheet

As of Dec 31, 2019, the company’s cash and cash equivalents totaled $176 million, down from $296 million as of Dec 31, 2018. Total outstanding debt was $7 billion, up from $5.2 billion as of Dec 31, 2018.

As of Dec 31, 2019, Ares Capital’s total assets amounted to $14.9 billion and stockholders’ equity was $7.5 billion.

Further, net asset value was $17.32 per share, up from $17.12.

Portfolio Activities

New gross commitments worth $1.6 billion were made during the quarter, down from $2.7 billion in the prior-year quarter. The company exited $1.2 billion of commitments compared with $1 billion a year ago.

How Have Estimates Been Moving Since Then?

Estimates review followed a downward path over the past two months.

VGM Scores

At this time, Ares Capital has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Ares Capital has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.