Ares Capital Misses on Q1 Earnings: Should You Sell or Hold the Stock?

Ares Capital Corporation ARCC announced its first-quarter 2025 results on April 29, recording lower portfolio exits and gross commitments. The company’s top and bottom-line numbers lagged the Zacks Consensus Estimate. This was mainly due to net realized and unrealized losses of $124 million.

Since the announcement of results, ARCC shares have lost 2.2%, indicating bearish investor sentiment. Let’s take a closer look to understand how to approach the stock amid a challenging operating backdrop. Before discussing this, let’s recap its quarterly performance.

A Quick Glance at Ares Capital’s Q1 Performance

Total Investment Income: Ares Capital’s total investment income was $732 million, up 4.4% year over year. The rise was largely driven by an increase in interest income from investments, capital structuring service fees, and other income.

On the other hand, Ares Capital’s close peers, Hercules Capital, Inc. HTGC and FS KKR Capital Corp. FSK, witnessed a decline in total investment income. Hercules Capital's total investment income declined 1.7% to $119.5 million, while FS KKR Capital’s total investment income fell 7.8% to $434 million.

Expenses: ARCC’s total expenses were $360 million, down 2.4%. The decrease was mainly due to negative capital gains incentive fees.

Portfolio Activities: Ares Capital made gross commitments worth $3.45 billion to new and existing portfolio companies, lower than $3.55 billion in the prior-year quarter.

Further, the company exited $2.86 billion of commitments compared with $3.41 billion a year ago.

The fair value of Ares Capital’s portfolio investments was $27.1 billion as of March 31, 2025. The fair value of accruing debt and other income-producing securities was $23.9 billion.

Factors to Support Ares Capital’s Stock

Rising Investment Commitments to Aid Investment Income: Ares Capital has been witnessing growth in its total investment income over the years. While the metric declined in 2020, it witnessed a five-year (2019-2024) compound annual growth rate (CAGR) of 14.4%. The momentum continued during the first quarter of 2025. The rise has been primarily driven by an increase in demand for personalized financing solutions, leading to higher investment commitments.

Revenue Trend

In 2024, 2023, 2022, 2021, 2020 and 2019, the company originated $15.1 billion, $6 billion, $9.9 billion, $15.6 billion, $6.7 billion and $7.3 billion, respectively, in gross investment commitments to new and existing portfolio companies. Moreover, in the first quarter of 2025, the company made gross commitments of $3.5 billion. From April 1, 2025 to April 24, 2025, the company made new investment commitments worth roughly $492 million, of which roughly $406 million was funded.

As of March 31, 2025, ARCC had a diversified investment portfolio of $27.1 billion across 566 portfolio companies, thereby reducing concentration risk and enhancing the sustainability of total investment income. It had 23.6% of its investment portfolio in software & services and 13.4% in healthcare equipment & services. Other major investment areas were financial services (9.6%), commercial & professional services (9.5%) and insurance services (6.2%).

Investment Portfolio

ARCC’s total investment income is likely to decline in the near term due to relatively high interest rates, subdued demand for customized financing and delays in investment commitments amid an uncertain operating backdrop.

Sales Estimates

Impressive Capital Distributions: As of March 31, 2025, Ares Capital had a debt of $13.9 billion, while cash and cash equivalents (including restricted cash) were $742 million. Additionally, the company has a revolving credit facility, allowing it to borrow up to $4.5 million as needed.

Given a decent balance sheet position, the company has been engaging in capital distribution activities. ARCC distributed 90% of its taxable income as dividends to maintain its status as a regulated investment company.

The company last hiked its dividends in 2022 by 11.6% to 48 cents per share. The company has increased its dividend four times in the last five years with an annualized dividend growth of 5.36%. Its dividend payout ratio is 86%.

Dividend Yield

Similarly, FS KKR Capital has increased its dividends 11 times in the last five years, while Hercules Capital has increased it nine times during the same period.

ARCC also has an ongoing repurchase plan. This February, it announced an extension of its existing share repurchase authorization of $1 billion, set to expire on Feb. 15, 2026.

Bearish Analyst Sentiments for ARCC Stock

Over the past week, the Zacks Consensus Estimate for 2025 and 2026 earnings of $2.05 and $2.03, respectively, has been revised 3.3% and 2.9% downward, respectively.

Estimate Revision Trend

The projected figures imply a decline of 12% and 0.9% for 2025 and 2026, respectively. (Find the latest EPS estimates and surprises on Zacks Earnings Calendar.)

How to Play Ares Capital Stock Now

Year to date, shares of Ares Capital have declined 5% compared with the industry’s fall of 8.4%. Further, the stock has fared better than its peers, FS KKR Capital and Hercules Capital.

ARCC’s Year-to-Date Price Performance

The broader market continues to witness volatility given uncertainties regarding tariff policy impact, elevated inflationary pressure, economic slowdown and rising geopolitical risks.

Further, subdued demand for customized financing due to higher-for-longer interest rates, inflationary pressure, and high unrealized and realized losses will likely hurt Ares Capital’s growth prospects.

Moreover, a steady rise in expenses is a headwind. Although expenses dipped in 2020 and 2022, the company recorded a five-year CAGR of 16.6% (ended 2024) due to higher interest and credit facility fees and income-based fees. Overall costs are expected to be elevated in the near term due to the company’s expansion efforts.

Expense Trend

In terms of valuation, Ares Capital’s price-to-book ratio (P/B) of 1.05X is higher than the industry's 0.94X. Thus, the stock is trading at a premium. This suggests that investors may pay a higher price than the company's expected earnings growth.

P/B Ratio

Further, bearish analyst sentiments are a headwind.

Thus, investors should watch out for these concerns and monitor how Ares Capital navigates the current operating backdrop. Those who own the stock can sell it off to book profits.

Currently, ARCC carries a Zacks Rank #4 (Sell).
 
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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