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Rise in Customized Financing Aids Hercules Capital Amid Cost Woes
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Hercules Capital, Inc. (HTGC - Free Report) is well-positioned for top-line growth, supported by the growing demand for customized financing on the back of rate cuts. However, as the company continues to undertake efforts to improve originations, expenses will likely remain elevated, thus hurting profits.
Key Growth Drivers for HTGC
Despite the challenging macroeconomic backdrop, Hercules Capital has been witnessing a growing demand for customized financing from private equity firms and venture capitalists, which has aided growth in total new commitments. This, in turn, has supported growth in total investment income.
Over the last five years (2018-2023), the company’s total investment income witnessed a compound annual growth rate (CAGR) of 17.3%, with the uptrend continuing in the first half of 2024. We expect the metric to rise 8.2% in 2024, 5.4% in 2025 and 0.6% in 2026.
HTGC maintains a robust balance sheet position. As of June 30, 2024, it had $482 million in liquidity, including $27.7 million in unrestricted cash and cash equivalents, and $454.3 million in credit facilities.
The company also has the availability to draw on credit facilities when required. Thus, supported by sufficient earnings strength and a solid balance sheet, HTGC is expected to be able to continue to meet debt obligations in the near term, even if the economic situation worsens.
Hercules Capital’s concentrated focus on its credit performance is impressive. In 2021, 2022 and 2023, it closed $2.6 billion, $3.1 billion and $2.2 billion, respectively, in new debt and equity commitments. From the end of the second quarter of 2024 to July 29, it closed new gross debt and equity commitments worth $28.1 million.
In order to maintain its RIC status, the company distributes approximately 90% of its taxable income. It announced a 2.6% increase in quarterly distribution in August 2023, following an 8.3% hike in February 2023, a 2.9% hike in October 2022, a 6.1% hike in July 2022, a 3.1% hike in October 2021 and a 3.2% hike in May 2019.
Management plans to revisit its dividend policy at the end of every quarter and determine if any changes are required. Given a solid liquidity position, HTGC will likely be able to continue enhancing shareholder value through efficient capital distribution activities.
Headwinds for HTGC
Hercules Capital’s total gross operating expenses witnessed a CAGR of 10.8% over the last five years (2018-2023), with the uptrend continuing in the first half of 2024. 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. We project total gross operating expenses to increase 11.7% and 12% in 2024 and 2025, respectively.
To comply with regulatory requirements, Hercules Capital invests primarily in U.S.-based companies and, to a lesser extent, in foreign names. Thus, persistent regulatory constraints amid a tough economic scenario may lead to increased costs of funding, and thereby limit the company’s access to the capital markets. Its foreign investment income will also be limited to support its overall financials.
HTGC’s Price Performance & Zacks Rank
Over the past six months, shares of Hercules Capital have gained 5.6% compared with the industry’s rally of 1%.
Earnings estimates for JHG for the current year have been revised 5.2% upward over the past 60 days. The company’s share price has increased 18% over the past six months.
Estimates for AB’s current-year earnings have been revised 1% upward over the past 60 days. The company’s shares have risen 1.5% over the past six months.
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Rise in Customized Financing Aids Hercules Capital Amid Cost Woes
Hercules Capital, Inc. (HTGC - Free Report) is well-positioned for top-line growth, supported by the growing demand for customized financing on the back of rate cuts. However, as the company continues to undertake efforts to improve originations, expenses will likely remain elevated, thus hurting profits.
Key Growth Drivers for HTGC
Despite the challenging macroeconomic backdrop, Hercules Capital has been witnessing a growing demand for customized financing from private equity firms and venture capitalists, which has aided growth in total new commitments. This, in turn, has supported growth in total investment income.
Over the last five years (2018-2023), the company’s total investment income witnessed a compound annual growth rate (CAGR) of 17.3%, with the uptrend continuing in the first half of 2024. We expect the metric to rise 8.2% in 2024, 5.4% in 2025 and 0.6% in 2026.
HTGC maintains a robust balance sheet position. As of June 30, 2024, it had $482 million in liquidity, including $27.7 million in unrestricted cash and cash equivalents, and $454.3 million in credit facilities.
The company also has the availability to draw on credit facilities when required. Thus, supported by sufficient earnings strength and a solid balance sheet, HTGC is expected to be able to continue to meet debt obligations in the near term, even if the economic situation worsens.
Hercules Capital’s concentrated focus on its credit performance is impressive. In 2021, 2022 and 2023, it closed $2.6 billion, $3.1 billion and $2.2 billion, respectively, in new debt and equity commitments. From the end of the second quarter of 2024 to July 29, it closed new gross debt and equity commitments worth $28.1 million.
In order to maintain its RIC status, the company distributes approximately 90% of its taxable income. It announced a 2.6% increase in quarterly distribution in August 2023, following an 8.3% hike in February 2023, a 2.9% hike in October 2022, a 6.1% hike in July 2022, a 3.1% hike in October 2021 and a 3.2% hike in May 2019.
Management plans to revisit its dividend policy at the end of every quarter and determine if any changes are required. Given a solid liquidity position, HTGC will likely be able to continue enhancing shareholder value through efficient capital distribution activities.
Headwinds for HTGC
Hercules Capital’s total gross operating expenses witnessed a CAGR of 10.8% over the last five years (2018-2023), with the uptrend continuing in the first half of 2024. 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. We project total gross operating expenses to increase 11.7% and 12% in 2024 and 2025, respectively.
To comply with regulatory requirements, Hercules Capital invests primarily in U.S.-based companies and, to a lesser extent, in foreign names. Thus, persistent regulatory constraints amid a tough economic scenario may lead to increased costs of funding, and thereby limit the company’s access to the capital markets. Its foreign investment income will also be limited to support its overall financials.
HTGC’s Price Performance & Zacks Rank
Over the past six months, shares of Hercules Capital have gained 5.6% compared with the industry’s rally of 1%.
Image Source: Zacks Investment Research
Currently, HTGC carries a Zacks Rank #3 (Hold).
Stocks Worth Considering
A couple of better-ranked stocks from the finance space are Janus Henderson Group plc (JHG - Free Report) and AllianceBernstein Holding L.P. (AB - Free Report) . Currently, both JHG and AB carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Earnings estimates for JHG for the current year have been revised 5.2% upward over the past 60 days. The company’s share price has increased 18% over the past six months.
Estimates for AB’s current-year earnings have been revised 1% upward over the past 60 days. The company’s shares have risen 1.5% over the past six months.