Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Most Undervalued Companies for the Defensive Investor – July 2015. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a stock analysis showing a specific look at how Main Street Capital Corporation (MAIN) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Main Street Capital Corporation (MSCC) is a principal investment firm which provides customized debt and equity financing to lower middle market (LMM) companies and debt capital to middle market (Middle Market) companies. The Company’s portfolio investments are made to support management buyouts, recapitalizations, growth financings, refinancings and acquisitions of companies that operate in various industry sectors. MSCC invests primarily in secured debt investments, equity investments, warrants and other securities of LMM companies based in the United States and in secured debt investments of Middle Market companies generally headquartered in the United States. MSCC’s investment portfolio includes its investments in LMM portfolio companies, investments in Middle Market portfolio companies, Private Loan portfolio investments, Other Portfolio investments, and the investment in MSC Adviser I, LLC (the External Investment Manager).
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – FAIL
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
- Dividend Record – has paid a dividend for at least 10 straight years – FAIL
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – PASS
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$36.21|
|Value Based on 0% Growth||$21.23|
|Market Implied Growth Rate||1.90%|
|Net Current Asset Value (NCAV)||-$14.48|
Balance Sheet – March 2015
Earnings Per Share
Earnings Per Share – ModernGraham
Main Street Capital Corporation does not qualify for either the Defensive Investor and the Enterprising Investor. The Defensive Investor is concerned with the small size, low current ratio, short dividend history, and the insufficient earnings stability over the last ten years. The Enterprising Investor is concerned with the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities or proceed with a speculative attitude. As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $2.00 in 2011 to an estimated $2.50 for 2015. This level of earnings growth supports the market’s implied estimate of 1.9% annual earnings growth over the next 7-10 years, and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value falling within a margin of safety relative to the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on Main Street Capital Corporation (MAIN)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclaimer: The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.