Bailey Pemberton
4 min read
Hercules Capital has delivered a 63.5% share price gain over the past 5 years, yet the real crux for investors is whether that track record lines up with the returns it earns on its capital today. With fresh credit ratings news in the mix and the stock recently closing at US$16.41, the question is how much of those capital returns are already reflected in the current valuation.
-
The 63.5% return over 5 years puts Hercules Capital’s long term performance in focus and raises the issue of whether its current price properly reflects the returns it generates on its lending capital.
-
Fitch’s affirmation of Hercules Capital’s investment grade ratings with a stable outlook can support continued access to funding, which affects both the cost of capital and the level of returns the business can earn on that capital base.
-
What if you looked at Hercules Capital through its earnings instead? See what Hercules Capital’s 8.0x P/E says about the price.
For investors, the debate is whether Hercules Capital’s current share price is adequately supported by the returns it earns on the capital it deploys into venture and growth stage financing.
If you want to test the same question about the returns a business earns on its capital across a broader set of stocks, take a look at 30 resilient stocks with low risk scores.
Is Hercules Capital Still Cheap on Excess Returns?
The Excess Returns model looks at what Hercules Capital earns on its equity base after covering the cost of that equity. For Hercules Capital, the inputs point to a business earning more on its lending capital than investors are assumed to require, with stable EPS of $1.87 per share against a cost of equity of $1.10 per share and an excess return of $0.77 per share. That sits on a Book Value of $12.32 per share and an Average Return on Equity of 15.86%, using a stable book value anchor of $11.79 per share.
Because Fitch recently reaffirmed Hercules Capital’s investment grade ratings with a stable outlook, the gap between return on equity and the model’s equity cost appears less like a one off and more like something the market can monitor over time at the current $16.41 share price. The Excess Returns framework therefore suggests investors are paying for a lender that, based on these inputs, is earning above its modeled hurdle rate on a reasonably steady equity base, while the estimated intrinsic value still comes out substantially above where the stock is trading today. Find out what Hercules Capital could be worth using our Excess Returns estimate.
