Prospect Capital’s Valuation: Can It Improve in Fiscal 3Q16?



High yields

As of the beginning of May 2016, Prospect Capital (PSEC) stock has risen ~22% over the past quarter. It has fallen ~11% over the past one year. The company recorded a strong performance in the December 2015 quarter and managed to beat its estimates by $0.02 per share. But it saw higher yields and lower originations in the September 2015 quarter. The company has generated distributable income of $99.9 million, or $0.28 per weighted average share, exceeding $0.25 per share of dividends.

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In the March 2016 quarter, the company is expected to report EPS (earnings per share) of $0.26. Any positive earnings surprise could lead to a rise in the stock price. Prospect’s ~14.0% dividend yield is competitive among its investment management peers. Here’s how some peer dividend yields compare:

  • Apollo Investment (AINV): 14.6%
  • Ares Capital (ARCC): 10.7%
  • Blackstone (BX): 12.1%
  • KKR & Company (KKR): 10.2%

Together, these companies form 14.8% of the ProShares Global Listed Private Equity (PEX).

Notably, Prospect began repurchasing some of its own shares on July 28, 2015. These shares were trading at a significant discount to their net asset value. The company has repurchased more than 4.7 million shares of common stock at an average price of $7.25 per share. To date, it has made $34 million in total repurchases.

Declining valuation gap

Prospect Capital is currently trading at 7.3x on a one-year forward earnings basis. Its peers are trading at an average of 8.2x. Prospect’s valuation gap has declined over the past one month due to a sharp pullback in stock followed by a strong performance during the December quarter and a relatively lower valuation.

Prospect saw more exits than deployments in the December quarter. However, its yield improved on a year-over-year basis as well as a quarter-over-quarter basis. This reflects the success of its fund deployment. As Prospect Capital successfully deploys available capital through online lending, structured credit, and other high-yielding media and instruments, its revenues are expected to rise along with its yields.

Over the past few years, yields on debt investments have fallen due to quantitative easing, first in the United States and currently in Europe and Japan. But Prospect Capital’s stock appears to be rightly valued, with its current price-to-earnings adjusted ratio at 7.5x.

For related analysis, check out Market Realist’s Financials page.


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