Ares Capital (NASDAQ: ARCC), a business development company, is set to announce its Q3 earnings results on Tuesday, October 24th. Market analysts anticipate that the company will benefit from the current higher interest rate environment.
The Potential Impact of Higher Interest Rates
With a focus on middle market companies in the U.S., Ares Capital provides investments ranging from $30M to $500M. As banks become less likely to service middle market companies due to the higher rates, Ares Capital is able to lend at higher rates, which is expected to benefit the company’s core earnings per share (EPS).
Moreover, Ares Capital’s floating-rate debt portfolio is particularly well-positioned to take advantage of the higher rates scenario, further strengthening the potential impact on its profitability.
A Diverse Portfolio for Strong Returns
Ares Capital boasts a diverse portfolio and historically prioritizes investments in secured debt. However, in recent years, the company has shifted its investment strategy towards equity investments, which have yielded strong returns.
In the previous quarter, Ares Capital’s investment activity picked up, resulting in portfolios yields increase. The Q2 results surpassed consensus estimates, indicating positive momentum. Additionally, as of July 19, the company had a significant investment backlog of around $425M and a pipeline of $45M. During the same, it made new investment commitments of approximately $211M and exited around $118M of investment commitments.
Consistently Beating Expectations
Over the past two years, Ares Capital has exceeded EPS estimates 75% of the time and revenue estimates 75% of the time, highlighting its consistent performance.
In the last three months, analysts have made 8 upward revisions and 5 downward revisions to EPS estimates. Revenue estimates have seen 9 upward revisions and 0 downward revisions, indicating positive sentiment surrounding the company’s financial outlook.
With the upcoming Q3 earnings announcement, investors will be closely watching to see if Ares Capital can continue its streak of impressive performance in the face of a favorable interest rate environment.