Ares Capital (ARCC) Earnings Expected to Rise: Should You Buy It?

The market is expecting Ares Capital (ARCC) to post year-over-year earnings growth on higher revenue when it reports results for the quarter ended December 2018. This widely known consensus forecast is important when assessing the company’s earnings picture, but a strong factor that could impact its stock price in the near term is how well actual results compare to those estimates.

The earnings report, due out on February 12, 2019, could help the stock rise if those key numbers come out better than expected. On the other hand, if they fall short of expectations, the stock could fall.

While management’s discussion of business conditions during the earnings conference call will have the greatest impact on the durability of the immediate price change and future earnings expectations, it is worth having insight into the likelihood of an upside earnings per share surprise.

Zacks Consensus Estimate

The private equity firm is expected to report quarterly earnings at $0.41 per share in its upcoming report, representing a year-over-year change of 7.9%.

Revenue is expected to be $327.24 million, up 6.6% from the same quarter last year.

Estimate revision trend

The consensus EPS estimate for the quarter has been revised down 0.35% over the past 30 days to the current level. This is essentially a reflection of how the analysts covering the aggregate have reassessed their initial estimates during this period.

Investors should note that the total change may not necessarily reflect the direction of each individual analyst’s estimate revisions.

Price, Consensus and EPS Surprise

Whispers about earnings

Estimate revisions ahead of a company’s earnings release provide a guide to business conditions in the period in which the earnings are released. Our proprietary surprise prediction model, the Zacks Earnings ESP (Expected Surprise Prediction), has this insight at its core.

The Zacks Earnings ESP compares the Most Accurate Estimate to the Zacks Consensus Estimate for the quarter; the Most Accurate Estimate is a version of the Zacks Consensus that is subject to change. The idea is that the analysts revising their estimates just before an earnings release have the latest information, which could potentially be more accurate than what they and other contributors to the consensus had previously predicted.

So a positive or negative Earnings ESP reading theoretically indicates a likely deviation of actual earnings from consensus estimates. However, the model’s predictive power is only significant for positive ESP readings.

A positive Earnings ESP is a strong predictor of an earnings beat, especially when combined with a Zacks Rank #1 (Strong Buy), 2 (Buy), or 3 (Hold). Our research shows that stocks with this combination deliver a positive surprise almost 70% of the time, and a solid Zacks Rank actually boosts the predictive power of Earnings ESP.

It’s important to remember that a negative Earnings ESP reading does not indicate an earnings miss. Our research shows that it’s difficult to predict an earnings beat with any degree of confidence for stocks with negative Earnings ESP readings and/or Zacks Rank 4 (Sell) or 5 (Strong Sell).

What are the numbers for Ares Capital?

In the case of Ares Capital, the Most Accurate Estimate is higher than the Zacks Consensus Estimate, suggesting that analysts have recently become optimistic about the company’s earnings prospects. This has resulted in an Earnings ESP of +1.10%.

On the other hand, the company’s stock currently has a Zacks Rank #3.

So this combination indicates that Ares Capital will most likely beat consensus earnings per share estimates.

Are the financial results surprising? Does history matter?

Analysts often consider how well a company has been able to match consensus estimates in the past when calculating their future earnings estimates, so it’s worth looking at the surprise history to assess its impact on the upcoming numbers.

For the last reported quarter, it was expected that Ares Capital would post earnings of $0.40 per share when the actual result was $0.45, delivering a surprise of +12.50%.

The company has topped consensus earnings per share estimates three times over the last four quarters.

Summary

Beating or missing earnings may not be the only reason a stock goes up or down. Many stocks lose ground despite beating earnings because of other factors that disappoint investors. Similarly, unforeseen catalysts help many stocks gain despite missing earnings.

That said, betting on stocks that are expected to beat earnings expectations increases the odds of success. That’s why it’s worth checking a company’s Earnings ESP and Zacks Rank ahead of its quarterly earnings release. Be sure to use our Earnings ESP Filter to discover the best stocks to buy or sell before they release.

Ares Capital seems like a compelling candidate for outperformance. However, investors should look at other factors when betting on this stock or staying away from it ahead of its earnings release.

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