American Capital Strategies, Ltd's (ACAS) core 2Q08 operating results were four cents shy of our expectations.
Based on 2Q08 results and company guidance, we have adjusted our FY08 and FY09 earnings expectations to $2.90 per share and $2.95 per share, respectively, from $3.02 per share and $3.25 per share previously. At the current price level, the shares of ACAS trade at 0.77x its current NAV of $27.01 per share, which continues to remain below its 10-year historical range of 1.2 1.7x for the past several of quarters and now in-line with its current peer group level.
The company's business lines primarily consist of private companies. Therefore, it is very difficult to forecast ACAS earnings with significant precision. This earnings volatility has enhanced the current discounted view of this company as of late. However, we believe that ACAS earnings and dividend growth in late 2008 have the potential to benefit from current pipeline of new investment opportunities, as well as the containment of asset quality.
We think the high dividend yield if it remains intact should provide substantial downside protection and will be the major component of shareholder return over the next year.
Our new six-month price target of $21.15 per share, down from $33.50 per share, incorporates a 0.80x our estimated book value of $26.40 per share at December 31, 2008 which equates to a total return of 12.0%. Considering the pressure on earnings in 2008 and into 2009, we suspect that the sizable dividend yield could be in jeopardy of being reduced. Therefore, we are maintaining our rating on the shares of ACAS as a Hold.
Read the full analyst report on ACAS
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