Ares Capital Corporation (ARCC) A Company worth Watching

Ares Capital Corporation (ARCC)

 

Sector: Financial

Industry: Diversified Investments

Ares Capital Corporation (ARCC) is a private equity firm. The firm specializes in acquisition, recapitalization, mezzanine debt, restructurings, rescue financing, and leveraged buyout transactions of middle market companies. It also makes growth capital and general refinancing. It prefers to make investments in companies engaged in the basic and growth manufacturing, business services, consumer products, health care products and services, and information technology service sectors.

 

How valuable is the Stock?

How does one know how valuable a stock is? Cash is King! If this is the case, ARCC has what it takes to blossom as an investment. When we think about value we have to think about the potential growth. How much potential? Something called the price to sales ratio gives us the best indicator of this. The more money a company has coming in through sales compared to how much working capital it has speaks volume of its health. The lower the price/sales ratio, the healthier it is. If we compare ARCC to its industry, we find a mind-blowing embryonic possibility to sprout and grow. The industry comes in with an 85.13 ratio while ARCC stands at 8.53. It screams; “I have what it takes to get bigger!” If we take seriously “Cash is King,” then the second most important thing we need to consider is how much money is flowing through this company as compared to its price. This is called the price to cash flow ratio. The closer the ratio gets to that magical “100” the less capability a company has. “100” means it can just pay its bills because the value of the company is equal to the amount of money coming in and no more. The industry stands at 29.80 while ARCC shows off one third of that, coming in at 10.30. We have an abundance of upside potential compared to the industry as a whole. Since we compare companies to their industry to define their health there are two more ratios that we consider. Each ratio is defined by how low it is. The lower the better value the company has. The price to earnings ratio (P/E Ratio) and the price to book ratio also come in lower than the industry as a whole.

Our conclusion- this is still highly under valued! We give it an “A”

 

How profitable is the Company?

If a company has a good sales force and the money is flowing, that is a possible good sign for an investment. But alone, this is not good. What if a company brings in money but then spends it as fast as it brings it in? What if it costs them almost as much to make a sale as it does to sell? These are important things to think about and know if you are going to put your money into a company. To know things like this, I would ask the question: “How much money is left over from a sale after you pay all your costs to make that sale?” This is called the gross margin. Comparing the industry to ARCC, the industry comes in at 38.10%, so for every dollar sold, 38.1 cents is left over. It costs the industry 61.9 cents to make one dollar. ARCC’s gross margin is 73.2%. Wow! This means that it is costing ARCC only 26.8 cents to make a dollar. This is less than half the industry as a whole! The only other question I would ask is: “How good is the company at controlling its costs?” This is sometimes referred to as the net profit margin. If we divide the net profit by net revenues we come up with a %. The higher the % the better at money management the company is. The industry’s net profit margin is 3.4%. So, for every dollar they make (after taxes) their REAL profit is 3.4 cents. ARCC comes in at an astounding 19.50%! They are far more profitable than the industry as a whole. The 5 year margins also have ARCC above the Industry as whole.

Our Conclusion- this company is extremely profitable! We give it an “A”

 

 

Can the Company Pay its Debts?

With the financial collapse in 2008 of the markets and all the companies that would have gone under because they could not pay off their debt, we like to know how strong a company is before we are willing to invest our money in it. “Here Today, Gone Tomorrow” is not something we think wise. We like ARCC here. The first question we would ask any company is how much debt has you accumulated as compared to the amount of money and/or property you own? This is known as the debt/equity ratio. If a company has potential for growth it will have a lot more cash than it would debt. The industry ratio is 4.93 this means that on a whole; companies in this field have financed the majority of their assets through debt. This industry on a whole is blisteringly high. ARCC is not in the norm for the industry they pop up a very healthy .77 that is light years better than the average company they are compared to. And the second most important thing to look at is a company’s ability to pay the interest on its debt. Who wants to invest in a company that can barely pay its interest while its debt just grows fat and happy? This is called the Interest Coverage Ratio. The lower the ratio the higher the burden of debt is on a company. The ratio for the Diversified Investments Industry is 3.40. ARCC boasts an other-worldly 19.50! Wow can it pay its debts? With ease!

Our Conclusion- this company can handle its debts with ease! We give it an “A”

 

How smart are they at using their money & assets to make more money?

I want to know how savvy the company is at making money with what they have now. This will give me an indication of how ell I think they can do in the future given we do not know what events may occur. The first thing I want to know is how well they generate income from the money shareholders give them. So if I give them a dollar what can I expect their return on that dollar to be? This is known as return on equity. The industry average is 24.7% while ARCC is 17.2%. So they fall a bit short of the industry as a whole. Not only do I want to know how well they use their money to generate money but I may also want to know how well they generate money with all their assets. This is known as return on assets. While the industry as a whole over the last year has been terrible, ARCC has faired much better. For every dollar in assets owned by the companies in diversified investments over the last year, they lost $816.00. ARCC made 8.6 cents for every dollar in assets they owned. Huge difference! The last question I would ask to see how savvy they are investing in themselves is this: “When you invest money back into the business (whether borrowed or owned) how much money to you makes for every dollar you invest? This is called return on capital. For every dollar the industry reinvests in itself, they average 17% return. ARCC does a little better at 17.2%!

Our Conclusion- this company is very savvy at making more money with the cash and assets they have now. We give them a B+

 

Technical Analysis

Long Term Investing

ARCC has been steadily moving up since March of 2009 and has gone from 3.97 to 15.86 so we are not sure how long we have for a real long term investment here. The stock still looks very strong and has not given any signs of slowing down. On the weekly chart, are still moving upward, following the top of the Bollinger Bands. This is strong. The RSI and MACD continue to glide steadily upward. We can go clear up to 20.55 which is its all time high.

Short Term

As we continue to move upward, one of the healthy signs we see here that make us think this is a good investment is that the RSI has rarely been oversold with this upward movement. Only a couple times has it moved up like that. But then, it has not stayed above that level. Presently like the rest of the market, we have a looked a bit skiddish. A weak Ascending Triangle has formed and this tends to want to keep moving up.

Resistance- We are looking at out first level of resistance at about 17.1 we have to go clear back to 2006 to find this. There is a lot of support for this to be the first challenge. After this, our next challenge will be 17.4 and then 18.0 respectively.

Support- If we do have a downward movement, look at a possible resting place of 15.5. If we break through there, look clear down to 14.25.

 

Opportunity

We still believe we are moving up here. This stock shows nothing but strength. Let’s watch the stock move through this minor Ascending Triangle and then possibly an option play is in order. Either an income producing strategy around 17-18 or a straight option but longer out, at least three months.