- The Washington Times - Monday, August 4, 2003

Analysts are predicting modest gains this financial quarter for Bethesda investment firm American Capital Strategies Ltd., and stronger long-term results if the economy continues to improve.

The company’s stock fell 4 percent last week, from $28.06 July 28 to $26.92 yesterday. But it has remained fairly steady in the last six months.

American Capital, which generally invests $5 million to $50 million per transaction, has invested heavily in mezzanine and debt financing — or lending money for buyouts led by other firms — this year, opting to forgo sole buyouts.

The company last week invested $33 million in Roadrunner Freight Systems Inc., a Milwaukee-based transportation service company, with LaSalle Bank providing credit and a loan.

American Capital also spent $42 million last week on Escort Inc., an Ohio electronic car parts manufacturer, in the form of aloan with two other private equity firms supplying credit and debt funds.

President and Chief Executive Officer Malon Wilkus said the company plans to stick with the service for the time being because of “pricing pressures in the market” that have raised the prices of solely buying out a company.

“We plan to take advantage of whichever set of services fits the current market situation,” Mr. Wilkus said.

That strategy has lessened some of the company’s risk, which assured analyst Donald Destino with JMP Securities, a San Francisco research firm. He rated the company as outperforming the market.

“American Capital has been managing its growth and credit this year and has kept from stretching or being overly aggressive in the market,” said Mr. Destino, who does not own any stock in the company.

Todd Pitsinger, a research analyst with Arlington investment firm Friedman, Billings, Ramsey, Group Inc., said American Capital’s variety of financing options for the buyout process has given the company a competitive edge in the equity market.

“Their asset quality is a little weaker than we like to see, but that really is the result of a soft economy right now,” Mr. Pitsinger said, rating the stock as outperforming other equity firms.

Mr. Pitsinger, who does not own any stock in American Capital, said he expected second-quarter results released later today to “show continued expansion in American Capital’s business model in a modest growth.”

In the first quarter ended March 31, operating income rose 35 percent to $31 million (65 cents per diluted share) from $23 million (61 cents) in the 2002 period. Diluted earnings per share show the value of convertible warrants and stock options.

Mr. Wilkus said the company, which has invested $1.8 billion in some 100 middle-market companies since it went public in 1997, is on track to hit $2.79 to $2.87 per diluted share for the year.

Richard Shane Jr., a senior research analyst at Jefferies & Co., forecast stronger returns on investments in 2004.

“I see stabilization in the company’s portfolio that won’t swing upward until we have a stronger economic recovery” in the private equity market, he said.

But when smaller and midsize companies start rebounding, American Capital is set for higher profits, Mr. Shane added, rating the stock a “buy.” Mr. Shane and Jefferies Co., a subsidiary of New York investment bank Jefferies Group Inc., do not own American Capital stock.

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