Main Street Capital: A Strong Buy

Zacks

Rising earnings estimates on the back of strong second quarter results – including a 6.8% earnings surprise – have helped Main Street Capital Corporation (MAIN) achieve a Zacks #1 Rank (Strong Buy) on September 1. Moreover, this diversified investment company has delivered positive earnings surprises for four straight quarters with an average beat of 11.5%. 
 
With a solid year-to-date return of 28.3%, a history of beating quarterly earnings estimates as well as a steady dividend increase trend, this stock offers an attractive investment opportunity.
 
The Rank Driver
 
Better-than-expected second-quarter earnings and steady improvement in investment portfolio are the primary rank drivers for this stock. Moreover, continued improvement in investment income will help enhance its profitability in the upcoming quarters.
 
On August 2, Main Street reported its second quarter results with earnings per share of 47 cents, beating the Zacks Consensus Estimate of 44 cents by 6.8% and the year ago-earnings of 41 cents by 14.6%.
 
Second-quarter results were aided by impressive growth in total investment income. Nevertheless, considerably high expenses marginally marred the results.
 
Total investment income of $20.8 million surged 29.2% from the year-ago quarter. A significant hike of 63.3% in total investment income from non-affiliated/non-control investments was primarily responsible for the surge.
 
Total expenses were $8.0 million, increasing 23.1% from $6.5 million in the prior-year quarter. Expenses shot up mainly due to higher interest expenses and share-based compensation expenses.
 
The fair value of Main Street’s total investment portfolio was $790.8 million as of June 30, 2012, up 20.2% from $658.1 million as of December 31, 2011. 
 
Earnings Estimate Revisions
 
Over the last 30 days, the Zacks Consensus Estimate for 2012 increased 3.8% to $1.89 per share based on three out of five upward estimate revisions. The current estimate implies a year-over-year growth of 5.0%.
 
For 2013, four out of five estimates were revised upward over the same time frame, lifting the Zacks Consensus Estimate by 4.8% to $1.97 per share.
 
Valuation
 
Main Street currently trades at a forward P/E of 14.1x, in line with the peer group average. On a price-to-book basis, the shares are trading at 1.6x, a 45.5% premium to the peer group average of 1.1x. Given the company's strong fundamentals, the valuation looks justified.
 
Main Street has a trailing 12-month return on equity (:ROE) of 11.4% compared with the peer group average of 10.1%.
 
About the Company
 
Based in Houston, Texas, Main Street is mainly a principal investment company. It specializes in equity, equity related, and debt investments in small and lower middle market companies. Main Street's lower and middle market companies normally have annual revenues between $10 million and $150 million. Main Street's middle market debt investments are focused on businesses that generally have annual revenues of more than $150 million. Incorporated in 1997, the company mainly invests in firms based in the Southern, South Central, and Southwestern regions of the United States. It has a market capitalization of roughly $839.8 million.
 
Other Zacks #1 Rank financial stocks include TICC Capital Corp. (TICC) Medley Capital Corporation (MCC).
Rising earnings estimates on the back of strong second quarter results – including a 6.8% earnings surprise – have helped Main Street Capital Corporation (MAIN) achieve a Zacks #1 Rank (Strong Buy) on September 1. Moreover, this diversified investment company has delivered positive earnings surprises for four straight quarters with an average beat of 11.5%. 
 
With a solid year-to-date return of 30.2%, a history of beating quarterly earnings estimates as well as a steady dividend increase trend, this stock offers an attractive investment opportunity.
 
The Rank Driver
 
Better-than-expected second-quarter earnings and steady improvement in investment portfolio are the primary rank drivers for this stock. Moreover, continued improvement in investment income will help enhance its profitability in the upcoming quarters.
 
On August 2, Main Street reported its second quarter results with earnings per share of 47 cents, beating the Zacks Consensus Estimate of 44 cents by 6.8% and the year ago-earnings of 41 cents by 14.6%.
 
Second-quarter results were aided by impressive growth in total investment income. Nevertheless, considerably high expenses marginally marred the results.
 
Total investment income of $20.8 million surged 29.2% from the year-ago quarter. A significant hike of 63.3% in total investment income from non-affiliated/non-control investments was primarily responsible for the surge.
 
Total expenses were $8.0 million, increasing 23.1% from $6.5 million in the prior-year quarter. Expenses shot up mainly due to higher interest expenses and share-based compensation expenses.
 
The fair value of Main Street’s total investment portfolio was $790.8 million as of June 30, 2012, up 20.2% from $658.1 million as of December 31, 2011. 
 
Earnings Estimate Revisions
 
Over the last 30 days, the Zacks Consensus Estimate for 2012 increased 3.8% to $1.89 per share based on three out of five upward estimate revisions. The current estimate implies a year-over-year growth of 5.0%.
 
For 2013, four out of five estimates were revised upward over the same time frame, lifting the Zacks Consensus Estimate by 4.8% to $1.97 per share.
 
Valuation
 
Main Street currently trades at a forward P/E of 14.3x, in line with the peer group average. On a price-to-book basis, the shares are trading at 1.6x, a 45.5% premium to the peer group average of 1.1x. Given the company's strong fundamentals, the valuation looks justified.
 
Main Street has a trailing 12-month return on equity (:ROE) of 11.4% compared with the peer group average of 10.1%.
 
About the Company
 
Based in Houston, Texas, Main Street is mainly a principal investment company. It specializes in equity, equity related, and debt investments in small and lower middle market companies. Main Street's lower and middle market companies normally have annual revenues between $10 million and $150 million. Main Street's middle market debt investments are focused on businesses that generally have annual revenues of more than $150 million. Incorporated in 1997, the company mainly invests in firms based in the Southern, South Central, and Southwestern regions of the United States. It has a market capitalization of roughly $852.4 million.
 
Other Zacks #1 Rank financial stocks include TICC Capital Corp. (TICC) and Medley Capital Corporation (MCC).
Read the Full Research Report on TICC

Read the Full Research Report on MCC

Read the Full Research Report on MAIN

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