Rating Update: Stock Rating B-Positive (12/3/19)-WhiteHorse Finance Inc (WHF).

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BUSINESS

WhiteHorse Finance, LLC is a business development company.
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INVESTMENT RATING

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WHF’s future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to continue to be a modest Value Builder.

WhiteHorse Finance has a current Value Trend Rating of B (Positive).
This rating combines inconsistent signals from two proprietary PTR measures of a stock’s attractiveness. WhiteHorse Finance has a neutral Power Rating of 51 but a good Appreciation Score of 80, with the Positive Value Trend Rating the result.

WhiteHorse Finance’s stock is selling well below targeted value. The current stock price of $14.26 compares to targeted value 12 months forward of $28.
This high appreciation potential results in an appreciation score of 80 (only 20% of the universe has greater appreciation potential.)
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WhiteHorse Finance has a Power Rating of 51. (This neutral Power Rating indicates that WHF’s chances of enjoying favorable investment performance over the near to intermediate term are only average.)
Factors contributing to this neutral Power Rating include: earnings estimate behavior for WHF has been slightly favorable recently; and is currently in a modestly favorable positi. An offsetting factor is recent price action has been neutral.

INVESTMENT PROFILE

WHF’s financial strength is high. Financial strength rating is 73.
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Relative to the S&P 500 Composite, WhiteHorse Finance Inc has moderate Value characteristics; its appeal is likely to be to investors heavily oriented toward Income; the perception is that WHF is normal risk. All factors are relative weaknesses. Relative weaknesses for WHF include: low forecasted profitability, low historical profitability, low expected growth, and high earnings variability. WHF’s valuation is low: high dividend yield, low P/E ratio, and low price/book ratio. WHF has unusually low market capitalization.

CURRENT SIGNALS

WhiteHorse Finance’s current operations are eroding. Return on equity is falling, reflecting: declining pretax margin; and falling leverage.

WhiteHorse Finance’s current technical position is very weak. The stock price is in a 4.7 month down move. The stock has declined 16.1% from its prior high. The stock price is below its 200 day moving average which is in a downtrend. The 200 day moving average has just turned down.

ALERTS

WhiteHorse Finance Inc (NASDAQ: WHF) has recently enjoyed significant positive changes in fundamentals: significant quarterly earnings acceleration occurred, and the consensus estimate for December, 2019 increased significantly.
The stock is currently rated B.
WhiteHorse Finance Inc (NASDAQ: WHF) stock enjoyed a major increase of 13.8% on 12/3/19. The shares closed at $2.72. However, trading volume in this advance was below average at 77% of normal. The stock has performed in line with the market over the last nine months and is unchanged during the last week.

CASH FLOW

In 2018, WhiteHorse Finance experienced a significant decline in cash of -$5.20 million (-13%). Sources of cash were lower than uses. Cash generated from 2018 EBITDA totalled +$36.60 million. Non-operating sources contributed +$32.04 million (+88% of EBITDA). In 2018, there were no cash taxes paid. Re-investment in the business amounted to -$27.38 million (-75% of EBITDA). On a net basis, debt investors removed -$17.51 million (-48% of EBITDA) while equity investors pulled out -$28.96 million (-79% of EBITDA).
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WhiteHorse Finance’s Non-operating Income, %EBITDA has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by an opposite trend for the Whitehorse Finance Inc Peer Group. (Since 2015 Non-operating Income, %EBITDA has accelerated very sharply.) In most years, WhiteHorse Finance was in the lower quartile and second quartile. Currently, WhiteHorse Finance is at the upper quartile at +88% of EBITDA (+$32.04 million).

WhiteHorse Finance’s Cash Taxes, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Whitehorse Finance Inc Peer Group as well. In most years, WhiteHorse Finance was in the top quartile. Currently, WhiteHorse Finance is at the upper quartile at 0% of EBITDA ( $0.00 million).

WhiteHorse Finance’s Business Re-investment, %EBITDA has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Whitehorse Finance Inc Peer Group. In most years, WhiteHorse Finance was in the top quartile. Currently, WhiteHorse Finance is slightly above median at -75% of EBITDA (-$27.38 million).

WhiteHorse Finance’s Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Whitehorse Finance Inc Peer Group. In most years, WhiteHorse Finance was in the third quartile. Currently, WhiteHorse Finance is below median at -48% of EBITDA (-$17.51 million).

WhiteHorse Finance’s Equity Investors, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Whitehorse Finance Inc Peer Group. In most years, WhiteHorse Finance was in the lower quartile. Currently, WhiteHorse Finance is substantially below median at -79% of EBITDA (-$28.96 million).

WhiteHorse Finance’s Change in Cash, %EBITDA has experienced a very strong overall uptrend over the period. This improvement was accompanied by stability for the Whitehorse Finance Inc Peer Group. (Since 2015 Change in Cash, %EBITDA has experienced a very sharp decline.) In most years, WhiteHorse Finance was in the top quartile. Currently, WhiteHorse Finance is substantially below median at -14% of EBITDA (-$5.20 million).
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WhiteHorse Finance’s Cash, %Revenue has suffered a very strong overall downtrend over the period. This downtrend was accompanied by stability for the Whitehorse Finance Inc Peer Group. (Since 2014 Cash, %Revenue has experienced a very sharp recovery.) In most years, WhiteHorse Finance was in the top quartile. Currently, WhiteHorse Finance is upper quartile at +53%.

PROFITABILITY

WhiteHorse Finance’s return on equity has improved very significantly since 2012.
This very significant improvement was due to very strong positive trend in pretax operating return and very minor positive trend in non-operating factors.
The productivity of WhiteHorse Finance’s assets rose over the full period 2009-2019: asset turnover has exhibited a volatile overall uptrend that accelerated after the 2014 level.
Non-operating factors (income taxes and financial leverage) had a very small positive influence on return on equity.
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WhiteHorse Finance’s return on equity is above median (8.6%) for the four quarters ended September, 2019.
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Operating performance (pretax return on assets) is above median (4.8%) reflecting asset turnover that is upper quartile (0.12X) and at median pretax margin (40.7%).
Tax “keep” rate (income tax management) is at the upper quartile (100.0%) resulting in after tax return on assets that is above median.
Financial leverage (leverage) is at the lower quartile (1.79X).

GROWTH RATES

There are no significant differences between WhiteHorse Finance’s longer term growth and growth in recent years.
WhiteHorse Finance’s historical income statement growth has been in line with balance sheet growth. Revenue growth has paralleled asset growth; earnings growth has paralleled equity growth.

Annual revenue growth has been 2.3% per year.

Total asset growth has been 0.2% per year.

Annual E.P.S. growth has been 1.1% per year.

Equity growth has been -0.1% per year.

WhiteHorse Finance’s consensus growth rate forecast (average of Wall Street analysts) is 5.2% — above the average of the historical growth measures.
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Relative to the Whitehorse Finance Inc Peer Group, WhiteHorse Finance’s historical growth measures are erratic. E.P.S. growth (1.1%) has been above median. Revenue growth (2.3%) has been substantially below median. Equity growth (-0.1%) has been substantially below median. Total asset growth (0.2%) has been lower quartile.

Consensus growth forecast (5.2%) is upper quartile.
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PRICE HISTORY

Over the full time period, WhiteHorse Finance’s stock price performance has been significantly below market. Between April, 2013 and December, 2019, WhiteHorse Finance’s stock price fell -10%; relative to the market, this was a -54% loss.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 26.0% is above median relative to the S&P 500 Composite.
In addition to being above median relative to S&P 500 Composite, current annual total return performance through October, 2019 of 26.0% is at the upper quartile relative to WhiteHorse Finance Inc Peer Group.

Current 5-year total return performance of 13.9% is above median relative to the S&P 500 Composite.
Through October, 2019, with above median current 5-year total return of 13.9% relative to S&P 500 Composite, WhiteHorse Finance’s total return performance is upper quartile relative to WhiteHorse Finance Inc Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, WHF’s overall valuation is quite low. Four of five factors are upper quartile. The highest factor is the ratio of enterprise value/revenue, followed by the ratio of enterprise value/earnings before interest and taxes, then by the ratio of enterprise value/assets, then by the price/earnings ratio. The lowest factor, price/equity ratio, is lower quartile.
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WhiteHorse Finance has a major value gap compared to the median. For WHF to hit median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 7.64X to 10.52X. If WHF’s ratio of enterprise value/revenue were to rise to 10.52X, its stock price would be higher by $9 to $23.
For WHF to achieve upper quartile valuation relative to the WhiteHorse Finance Inc Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 7.64X to 11.34X. If WHF’s ratio of enterprise value/revenue were to rise to 11.34X, its stock price would increase by $11 from the current level of $14.

VALUE TARGETS

WHF’s future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to continue to be a modest Value Builder.
WhiteHorse Finance’s current Price Target of $28 represents a +96% change from the current price of $14.26.
This high appreciation potential results in an appreciation score of 80 (only 20% of the universe has greater appreciation potential.)
With this high Appreciation Score of 80, the neutral Power Rating of 51 results in an Value Trend Rating of B.
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WhiteHorse Finance’s current Price Target is $28 (-6% from the 2018 Target of $30 but +96% from the 12/03/19 price of $14.26). This slight fall in the Target is the result of a +3% increase in the equity base and a -9% decrease in the price/equity multiple. The forecasted increase in cost of equity has a slight negative impact on the price/equity multiple and the forecasted decline in return on equity has a slight negative impact as well. Partially offsetting these Drivers, the forecasted increase in growth has a large positive impact.
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PTR’s return on equity forecast is 9.0% — in line with our recent forecasts. Forecasted return on equity suffered a dramatic, erratic decline between 2012 and 2018. The current forecast is well below the 2012 peak of 16%.

PTR’s growth forecast is 4.0% — in line with our recent forecasts. Forecasted growth suffered a dramatic, variable decline between 2012 and 2018. The current forecast is steady at the 2013 low of 3%.

PTR’s cost of equity forecast is 6.3% — in line with recent levels. Forecasted cost of equity enjoyed a dramatic, erratic decline between 2012 and 2018. The current forecast is steady at the 2012 peak of 8.0%.
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At WhiteHorse Finance’s current price of $14.26, investors are placing a negative value of $-8 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 2.0% per year, and a return on equity of 9.6% versus a cost of equity of 5.8%.
PTR’s 2020 Price Target of $28 is based on these forecasts and reflects an estimated value of existing assets of $23 and a value of future investments of $5.

About John Lafferty 54938 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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