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 10 Stocks for Using A Benjamin Graham Value Investing Strategy – August 2016. 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. MSCC is primarily focused on providing 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. The Company 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. The Company’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).
Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Recent valuations of the components of the Dow Jones Industrial Average are available for free members, including this one of Microsoft Corporation. In addition, here is a post detailing what can be found within each individual company’s valuation.
Downloadable PDF version of this valuation:
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
|Defensive Investor; must pass 6 out of the following 7 tests.|
|1. Adequate Size of the Enterprise||Market Cap > $2Bil||$1,803,679,938||Fail|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||0.19||Fail|
|3. Earnings Stability||Positive EPS for 10 years prior||Pass|
|4. Dividend Record||Dividend Payments for 10 years prior||Pass|
|5. Earnings Growth||Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end||104.38%||Pass|
|6. Moderate PEmg Ratio||PEmg < 20||15.08||Pass|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||1.61||Pass|
|Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.|
|1. Sufficiently Strong Financial Condition||Current Ratio > 1.5||0.19||Fail|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||-1.53||Fail|
|3. Earnings Stability||Positive EPS for 5 years prior||Pass|
|4. Dividend Record||Currently Pays Dividend||Pass|
|5. Earnings Growth||EPSmg greater than 5 years ago||Fail|
Stage 2: Determination of Intrinsic Value
|MG Growth Estimate||-1.95%|
|MG Value based on 3% Growth||$33.14|
|MG Value based on 0% Growth||$19.43|
|Market Implied Growth Rate||3.29%|
|% of Intrinsic Value||328.07%|
Main Street Capital Corporation does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the small size, low current ratio. The Enterprising Investor has concerns regarding the level of debt relative to the current assets, and the lack of earnings growth over the last five years. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.
As for a valuation, the company appears to be Overvalued after seeing its EPSmg (normalized earnings) decline from $2.63 in 2012 to an estimated $2.29 for 2016. This level of demonstrated earnings growth does not support the market’s implied estimate of 3.29% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.
At the time of valuation, further research into Main Street Capital Corporation revealed the company was trading above its Graham Number of $30.84. The company pays a dividend of $2.16 per share, for a yield of 6.3%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 15.08, which was below the industry average of 19.87, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-15.72.
Main Street Capital Corporation scores quite poorly in the ModernGraham grading system, with an overall grade of D+.
Stage 3: Information for Further Research
|Net Current Asset Value (NCAV)||-$15.72|
|Number of Consecutive Years of Dividend Growth||2|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Balance Sheet Information||6/1/2016|
|Total Current Assets||$77,124,000|
|Total Current Liabilities||$396,590,000|
|Shares Outstanding (Diluted Average)||51,441,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$2.00|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$2.29|
Other ModernGraham posts about the company
Other ModernGraham posts about related companies
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. See my current holdings here. This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions. ModernGraham is not affiliated with the company in any manner. Please be sure to review our detailed disclaimer.