Prospect Capital Yielded 14%, Maintained Good Growth in 1Q16



Net asset value falls

Prospect Capital (PSEC) stock is down 24% over the past year on falling yields in middle-market debt investments. The company reported that its September quarter earnings beat Wall Street analysts’ net income estimates of $0.25 with a posted net income of $0.26.

The company’s market capitalization currently stands at $2.6 billion, and its net asset value fell from $10.31 per share on June 30, 2015, to $10.17 per share on September 30, 2015.

Prospect Capital’s net investment income fell to $91.2 million in fiscal 1Q16 (September end 2015) as compared to $94.5 million in fiscal 1Q15. However, net investment income was higher when compared with $89.5 million in the previous quarter.

Prospect reported revenues of $200.3 million in fiscal 1Q16, down by 8% on a year-over-year basis compared to analysts’ expectations of $197.0 million.

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Financial services

Prospect Capital is a financial services company that lends to and invests in middle-market, privately held companies. The company acts as a closed-end fund and is regulated as a business development company.

Prospect provides capital to companies in the form of senior and subordinated debt and equity. This capital is then used for acquisitions, divestitures, growth, development, and recapitalizations.

Prospect works with financial sponsors and management teams to identify investments with historical cash flows, asset collateral, or contracted pro forma cash flows. Prospect Capital investments are made based on one of nine origination strategies:

  1. Lending in private equity sponsored transactions
  2. Lending directly to companies not owned by private equity firms
  3. Control investments in corporate operating companies
  4. Control investments in financial companies
  5. Investments in structured credit
  6. Real estate investments
  7. Investments in syndicated debt
  8. Aircraft leasing
  9. Online lending

Other investment management players

Here’s how some of Prospect Capital’s peers in investment management fared with their respective quarterly earnings:

  • Ares Capital (ARCC) beat estimates by 8%
  • BlackRock Capital Investment (BKCC) beat estimates by 21%
  • Blackstone (BX) missed estimates
  • KKR & Company (KKR) missed estimates

Together, these companies form 5.9% of the PowerShares Global Listed Private Equity ETF (PSP).

Here are the two major questions we’ll be investigating in this series:

  • Can Prospect Capital Maintain or Grow its net asset value in the upcoming quarters?
  • What is the upside potential for high-yielding stock?

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