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What Could Prospect Capital’s Fiscal 3Q16 Earnings Look Like?

Robert Karr

Can Prospect Capital Build on Its Strong Platform in Fiscal 3Q16?

Stable deployment

Prospect Capital (PSEC) is expected to report its fiscal 3Q16 earnings on Tuesday, May 10, 2016, after the Market closes. The quarter ended on March 31, 2016. Prospect expects to post EPS (earnings per share) of $0.26. For fiscal 2016, EPS is expected to be $1.04. That translates to a 2016 price-to-earnings ratio of 7.2x compared to the industry average of 9x.

PSEC reported that earnings for fiscal 2Q16, which ended December 31, 2015, beat Wall Street analysts’ net income estimates of $0.26 with a posted net income of $0.28.

In fiscal 3Q16, Prospect Capital is expected to see higher investment income as well as net asset value on higher deployments. The company is expected to see an increase of 2.4% in revenues on a year-over-year basis.

In fiscal 2Q16, Prospect’s NAV (net asset value) declined on unrealized depreciation based on volatility in capital markets rather than fundamental credit issues. The company’s NAV declined from $10.17 per share on September 30, 2015, to $9.65 per share on December 31, 2015.

Its net investment income rose to $100.9 million in fiscal 2Q16 compared to $91.3 million in fiscal 2Q15. Compared to the previous quarter, its net investment income rose $9.7 million. The company reported total investment income of $209.0 million in fiscal 2Q16, a rise of 5% on a year-over-year basis.

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

  • Ares Capital (ARCC): beat estimates
  • BlackRock Capital Investment (BKCC): beat estimates
  • Blackstone (BX): missed estimates
  • KKR & Company (KKR): missed estimates

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

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. It 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 also works with financial sponsors and management teams to identify investments with historical cash flows, asset collateral, or contracted pro forma cash flows.

Prospect’s 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

In this series, we’ll take a comprehensive look at Prospect Capital’s portfolio strategy, yields, balance sheet strength, and current valuations. Let’s start with its portfolio.

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