Contrasting Prospect Capital (PSEC) and Capital Southwest (CSWC)

Capital Southwest (NASDAQ: CSWC) and Prospect Capital (NASDAQ:PSEC) are both finance companies, but which is the superior investment? We will compare the two companies based on the strength of their analyst recommendations, dividends, valuation, earnings, profitability, risk and institutional ownership.

Volatility & Risk

Capital Southwest has a beta of 0.3, indicating that its stock price is 70% less volatile than the S&P 500. Comparatively, Prospect Capital has a beta of 0.43, indicating that its stock price is 57% less volatile than the S&P 500.

Dividends

Capital Southwest pays an annual dividend of $1.12 per share and has a dividend yield of 6.6%. Prospect Capital pays an annual dividend of $0.72 per share and has a dividend yield of 10.9%. Capital Southwest pays out 183.6% of its earnings in the form of a dividend, suggesting it may not have sufficient earnings to cover its dividend payment in the future. Prospect Capital pays out 84.7% of its earnings in the form of a dividend, suggesting it may not have sufficient earnings to cover its dividend payment in the future. Prospect Capital is clearly the better dividend stock, given its higher yield and lower payout ratio.

Analyst Ratings

This is a summary of recent recommendations for Capital Southwest and Prospect Capital, as provided by MarketBeat.com.

Sell Ratings Hold Ratings Buy Ratings Strong Buy Ratings Rating Score
Capital Southwest 0 1 4 0 2.80
Prospect Capital 1 3 0 0 1.75

Capital Southwest presently has a consensus target price of $20.00, suggesting a potential upside of 17.03%. Prospect Capital has a consensus target price of $5.50, suggesting a potential downside of 16.92%. Given Capital Southwest’s stronger consensus rating and higher probable upside, equities research analysts plainly believe Capital Southwest is more favorable than Prospect Capital.

Earnings and Valuation

This table compares Capital Southwest and Prospect Capital’s gross revenue, earnings per share and valuation.

Gross Revenue Price/Sales Ratio Net Income Earnings Per Share Price/Earnings Ratio
Capital Southwest $23.50 million 11.77 $23.47 million $0.61 28.02
Prospect Capital $701.05 million 3.43 $252.90 million $0.85 7.79

Prospect Capital has higher revenue and earnings than Capital Southwest. Prospect Capital is trading at a lower price-to-earnings ratio than Capital Southwest, indicating that it is currently the more affordable of the two stocks.

Profitability

This table compares Capital Southwest and Prospect Capital’s net margins, return on equity and return on assets.

Net Margins Return on Equity Return on Assets
Capital Southwest 91.90% 5.46% 4.45%
Prospect Capital 36.39% 8.31% 4.63%

Institutional & Insider Ownership

56.5% of Capital Southwest shares are owned by institutional investors. Comparatively, 14.1% of Prospect Capital shares are owned by institutional investors. 5.9% of Capital Southwest shares are owned by company insiders. Comparatively, 7.1% of Prospect Capital shares are owned by company insiders. Strong institutional ownership is an indication that endowments, large money managers and hedge funds believe a company is poised for long-term growth.

Summary

Prospect Capital beats Capital Southwest on 9 of the 16 factors compared between the two stocks.

About Capital Southwest

Capital Southwest Corporation is a business development company specializing in credit and private equity and venture capital investments in middle market companies, mezzanine, later stage, mature, late venture, emerging growth, buyouts, recapitalizations and growth capital investments. It does not invest in startups, publicly traded companies, real estate developments, project finance opportunities, oil and gas exploration businesses, troubled companies, turnarounds, and companies in which significant senior management is departing. In lower middle market, the firm typically invests in growth financing, bolt-on acquisitions, new platform acquisitions, refinancing, dividend recapitalizations, sponsor-led buyouts, and management buyouts situations. The investment structures are Unitranche debt, subordinated debt, senior debt, first and second lien debt, and preferred and common equity. The firm makes equity co-investments alongside debt investments, up to 20% of total check and only makes non-control investments. It prefers to invest in Industrial manufacturing and services, value-added distribution, healthcare products and services, business services, specialty chemicals, food and beverage, tech-enabled services and SaaS models. The firm seeks to invest in energy services and products, industrial technologies, and specialty chemicals and products. Within energy services and products, the firm seeks to invest in each segment of the industry, including upstream, midstream and downstream, excluding exploration and production with a focus on differentiated products and services, equipment and tool rental, consumable products, and drilling and completion chemicals. Within industrial technologies, it seeks to invest in automation and process controls, handling and packaging equipment, industrial filtration and fluid handling, measurement, monitoring and testing, professional tools, and sensors and instrumentation. Within and specialty chemicals and products, the firm seeks to invest in businesses that develop and manufacture highly differentiated chemicals and products including adhesives, coatings and sealants, catalysts and absorbents, cosmeceuticals, fine chemicals, flavors and fragrances, performance lubricants, polymers, plastics and composites, chemical dispensing and filtration equipment, professional and industrial trade consumables and tools, engineered solutions for HVAC, plumbing, and electrical installations, specified high performance materials for fire protection and oilfield applications. It may also invest in exceptional opportunities in building products. The firm seeks to invest in the United States. The firm seeks to make equity investments up to $5 million and debt investments between $5 million and $20 million and co-invest in transaction size upto $40 million. It prefers to invest in companies with revenues approaching above $10 million, profitable operations, historical growth rate of at least 15 percent per year, EBITDA between $3 million and $50 million. In addition to making direct investments, the firm allocates capital to syndicated first and second lien term loans in the upper middle market. Criteria for Upper Middle Market Syndicated 1st Lien is EBITDA Size more than $30 million, Closing Leverage greater than 4 times, investment hold size between $5 million and $7 million, investment yield greater than 6.5%. Criteria for Upper Middle Market Syndicated 2nd Lien is EBITDA Size more than $50 million, Closing Leverage greater than 6 times, investment hold size between $5 million and $7 million, investment yield greater than 9%. It prefers to take a majority and minority stake. The firm has the flexibility to hold investments for very long period in its portfolio companies. It may also invest through warrants. The firm prefers to take Board participation in its portfolio companies. Capital Southwest Corporation was founded on April 19, 1961 and is based in Dallas, Texas.

About Prospect Capital

Prospect Capital Corporation is a financial services company. The Company primarily lends to and invests in middle market privately held companies. The Company is a closed-end investment company. Its investment objective is to generate both current income and long-term capital appreciation through debt and equity investments. The Company invests primarily in senior and subordinated debt and equity of private companies in need of capital for acquisitions, divestitures, growth, development, recapitalizations and other purposes. The Company makes investments, including lending in private equity sponsored transactions, lending directly to companies not owned by private equity firms, control investments in corporate operating companies, control investments in financial companies, investments in structured credit, real estate investments, investments in syndicated debt, aircraft leasing and online lending. The Company is managed by its investment advisor, Prospect Capital Management L.P.

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