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Rise in Customized Financing Aids Hercules Capital (HTGC)

Hercules Capital, Inc.’s HTGC top line is expected to continue to improve on growing demand for customized financing. Moreover, backed by solid balance sheet and liquidity positions, its capital distribution activities seem sustainable.

Analysts seem optimistic regarding the company’s earnings growth potential. Over the past 60 days, the Zacks Consensus Estimate for HTGC’s 2023 earnings has been revised 2% upward. The company currently carries a Zacks Rank #2 (Buy).

Over the past year, shares of Hercules Capital have gained 10.3% compared with the industry’s rally of 4.3%.

 

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

 

Looking at its fundamentals, as of Sep 30, 2023, HTGC had $598 million in liquidity, including $32 million in unrestricted cash and cash equivalents, and $566 million in credit facilities. Also, the company has the availability to draw on credit facilities when required.

It has long-term issuer ratings of BBB- and Baa3 from Fitch Ratings and Moody’s Investors Service, respectively, along with a stable outlook, which renders it favorable access to the debt market.

Thus, supported by sufficient earnings strength and a solid balance sheet, the company is expected to be able to continue to meet debt obligations in the near term, even if the economic situation worsens.

We are encouraged by the company’s concentrated focus on its credit performance. In 2021, it closed $2.6 billion in new debt and equity commitments, while in 2022, it closed $3.13 billion. In the first nine months of 2023, the company reported $1.76 billion in gross new debt and equity commitments.

Driven by the rise in demand for customized financing and a robust deal pipeline, total new commitments are expected to keep rising, thus aiding total investment income growth. We expect the metric to jump 40.5% this year.

In order to maintain its RIC status, the company distributes approximately 90% of its taxable income. It announced a 2.6% increase in the quarterly distribution in August 2023, following an 8.3% hike in February 2023, a 2.9% rise in October 2022, a 6.1% increase in July 2022, 3.1% hike in October 2021 and a 3.2% hike in May 2019. Given a solid liquidity position, the company will likely be able to continue enhancing shareholder value through efficient capital distribution activities.

However, Hercules Capital’s total gross operating expenses have witnessed a compound annual growth rate of 9.4% over the last four years (2018-2022), with the upward trend continuing in the first nine months of 2023. The rise was mainly due to an increase in compensation costs and interest expenses. While the company’s efforts to expand originations will lead to enhanced growth prospects, it will likely result in elevated costs in the near term, which might put pressure on the bottom line.

A couple of other top-ranked stocks from the finance space are Prospect Capital Corporation PSEC and Horizon Technology Finance Corporation HRZN.

Earnings estimates for PSEC have been revised 8.1% upward for the current fiscal year over the past 60 days. The company’s share price has decreased 8% over the past three months. PSEC currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Horizon Technology also flaunts a Zacks Rank of 1. Its earnings estimates have been revised upward by 7.6% for the current year over the past 60 days. In the past three months, HRZN’s share price has increased 4.1%.

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Hercules Capital, Inc. (HTGC) : Free Stock Analysis Report

Horizon Technology Finance Corporation (HRZN) : Free Stock Analysis Report

Prospect Capital Corporation (PSEC) : Free Stock Analysis Report

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