BUSINESS
Main Street Capital Corporation is a business development company specializes in equity capital to lower middle market companies. The firm specializing in recapitalizations, management buyouts, refinancing, family estate planning, management buyouts, refinancing, industry consolidation, mature, later stage emerging growth. The firm also provides debt capital to middle market companies for acquisitions, management buyouts, growth financings, recapitalizations and refinancing. The firm seeks to partner with entrepreneurs, business owners and management teams and generally provides “one stop” financing alternatives within its lower middle market portfolio.
INVESTMENT RATING
MAIN is expected to continue to be a Value Builder reflecting capital returns that are forecasted to be above the cost of capital.
Main Street Capital has a current Value Trend Rating of B (Positive). This rating combines highly consistent signals from two proprietary PTR measures of a stock’s attractiveness. Main Street Capital has a slightly positive Power Rating of 68 and a good Appreciation Score of 71, triggering the Positive Value Trend Rating.
Main Street Capital’s stock is selling well below targeted value. The current stock price of $47.12 compares to targeted value 12 months forward of $92.
Main Street Capital’s high appreciation potential results in an appreciation score of 71 (only 29% of the universe has greater appreciation potential.)
Main Street Capital has a Power Rating of 68. (MAIN’s slightly positive Power Rating indicates that it has a higher likelihood of achieving favorable investment performance over the near to intermediate term than all but 32% of companies in the universe.) Factors contributing to this slightly positive Power Rating include: recent price action has been favorable; and the comparison group is currently in a modestly favorable position. An offsetting factor is the trend in MAIN’s earnings estimates has been unfavorable in recent months.
INVESTMENT PROFILE
MAIN’s financial strength is above average. Financial strength rating is 65.
Relative to the S&P 500 Composite, Main Street Capital Corp has moderate Value characteristics; its appeal is likely to be to investors heavily oriented toward Income; the perception is that MAIN is higher risk. All factors are relative weaknesses. Relative weaknesses for MAIN include: high stock price volatility, and high earnings variability. MAIN’s valuation is low: high dividend yield, low P/E ratio, and low price/book ratio. MAIN has unusually low market capitalization.
CURRENT SIGNALS
Main Street Capital’s current operations are eroding. Return on equity is falling, reflecting: declining pretax margin; and falling leverage.
Main Street Capital’s current technical position is very strong. The stock price is in a 17.7 month up move. The stock has appreciated 42.8% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.
ALERTS
Recent minimal positive changes in fundamentals have benefitted Main Street Capital Corp (NYSE: MAIN): significant quarterly earnings acceleration occurred. The stock is currently rated B. Main Street Capital Corp (NYSE: MAIN) stock closed at $47.12 on 4/3/24 after a slight gain of 0.2%. NORMAL trading volume accompanied the advance. The stock has risen 2.1% during the last week and has been strong relative to the market over the last nine months.CASH FLOW
In 2023, Main Street Capital generated a significant increase in cash of +$11.0 million (+22%). Sources of cash were larger than uses. Cash generated from 2023 EBITDA totaled +$441.6 million. Non-operating sources contributed +$112.1 million (+25% of EBITDA). Cash taxes consumed -$6.6 million (-2% of EBITDA). Re-investment in the business amounted to -$166.0 million (-38% of EBITDA). On a net basis, debt investors received -$310.4 million (-70% of EBITDA) while equity investors pulled out -$59.6 million (-14% of EBITDA).
Main Street Capital’s Non-operating Income, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by stability for the Main Street Capital Peer Group. In most years, Main Street Capital was in the top quartile and second quartile. Currently, Main Street Capital is upper quartile at +25% of EBITDA (+$112.1 million).
Main Street Capital’s Cash Taxes, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Main Street Capital Peer Group as well. In most years, Main Street Capital was in the lower quartile and top quartile. Currently, Main Street Capital is lower quartile at -2% of EBITDA (-$6.6 million).
Main Street Capital’s Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Main Street Capital Peer Group. (Since 2021 Business Re-investment, %EBITDA has accelerated very sharply.) In most years, Main Street Capital was in the second quartile and third quartile. Currently, Main Street Capital is substantially below median at -38% of EBITDA (-$166.0 million).
Main Street Capital’s Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Main Street Capital Peer Group. (Since 2021 Debt Investors, %EBITDA has accelerated very sharply.) In most years, Main Street Capital was in the third quartile and second quartile. Currently, Main Street Capital is below median at -70% of EBITDA (-$310.4 million).
Main Street Capital’s Equity Investors, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Main Street Capital Peer Group. In most years, Main Street Capital was in the second quartile and third quartile. Currently, Main Street Capital is above median at -14% of EBITDA (-$59.6 million).
Main Street Capital’s Change in Cash, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by a downtrend for the Main Street Capital Peer Group. In most years, Main Street Capital was in the second quartile and third quartile. Currently, Main Street Capital is below median at +2% of EBITDA (+$11.0 million).
Main Street Capital’s Cash, %Revenue has experienced a minor downtrend over the period. This downtrend was accompanied by a similar trend for the Main Street Capital Peer Group. In most years, Main Street Capital was in the third quartile and second quartile. Currently, Main Street Capital is substantially below median at +12%.
PROFITABILITY
Main Street Capital’s return on equity has improved significantly since 2014. The current level of 17.3% is 1.61X the low for the period and is -6.5% from the high.
This significant improvement was due to strong positive trend in pretax operating return and very minor positive trend in non-operating factors.
The productivity of Main Street Capital’s assets rose over the full period 2014-2023: asset turnover has exhibited a minor overall uptrend.
Main Street Capital’s pretax margin has exhibited little to no overall change over the period 2014-2023.
Non-operating factors (income taxes and financial leverage) had a very small positive influence on return on equity.
Main Street Capital’s return on equity is upper quartile (17.3%) for the four quarters ended December, 2023.
Operating performance (pretax return on assets) is upper quartile (10.2%) reflecting asset turnover that is slightly above median (0.11X) and upper quartile pretax margin (90.1%).
Tax “keep” rate (income tax management) is lower quartile (95.0%) resulting in after tax return on assets that is upper quartile.
Financial leverage (leverage) is lower quartile (1.79X).
GROWTH RATES
There are no significant differences between Main Street Capital’s longer term growth and growth in recent years. Main Street Capital’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 6.5% per year.
Total asset growth has been 4.4% per year.
Annual E.P.S. growth has been 5.7% per year.
Equity growth has been 3.5% per year.
No consensus growth rate forecast is available for Main Street Capital.
Relative to the Main Street Capital Peer Group, Main Street Capital’s historical growth measures are generally second quartile. E.P.S. growth (5.7%) has been upper quartile. Total asset growth (4.4%) has been slightly above median. Revenue growth (6.5%) has been substantially above median. Equity growth (3.5%) has been substantially above median.
Consensus growth forecast is unavailable.
PRICE HISTORY
Over the full time period, Main Street Capital’s stock price performance has been below market. Between June, 2013 and April, 2024, Main Street Capital’s stock price rose +70%; relative to the market, this was a -48% loss. Significant price moves during the period: 1) March, 2020 – July, 2022: +120%; 2) August, 2019 – March, 2020: -54%; and 3) September, 2015 – August, 2019: +65%.
TOTAL INVESTMENT RETURNS
Current annual total return performance of 17.7% 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 February, 2024 of 17.7% is above median relative to Main Street Capital Corp Peer Group.
Current 5-year total return performance of 11.2% is slightly above median relative to the S&P 500 Composite.
Through February, 2024, with slightly above median current 5-year total return of 11.2% relative to S&P 500 Composite, Main Street Capital’s total return performance is at the upper quartile relative to Main Street Capital Corp Peer Group.
VALUATION BENCHMARKS
Relative to S&P 500 Composite, MAIN’s overall valuation is low. The highest factor, the ratio of enterprise value/revenue, is upper quartile. Ratio of enterprise value/assets is below median. Ratio of enterprise value/earnings before interest and taxes is lower quartile. Price/equity ratio is lower quartile. The lowest factor, the price/earnings ratio, is lower quartile.
Relative to Main Street Capital Peer Group, MAIN’s overall valuation is high. The highest factor, the price/equity ratio, is upper quartile. Ratio of enterprise value/revenue is upper quartile. Ratio of enterprise value/assets is upper quartile. Price/earnings ratio is at median. The lowest factor, the ratio of enterprise value/earnings before interest and taxes, is at the lower quartile.
Main Street Capital has a major value gap compared to the median valuation. For MAIN to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 12.27X to 9.35X. If MAIN’s ratio of enterprise value/revenue were to fall to 9.35X, its stock price would be lower by $-17 to $30. For MAIN to fall to lower quartile valuation relative to the Main Street Capital Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 12.27X to 8.84X. If MAIN’s ratio of enterprise value/revenue were to fall to 8.84X, its stock price would decline by $-20 from the current level of $47.
VALUE TARGETS
MAIN is expected to continue to be a Value Builder reflecting capital returns that are forecasted to be above the cost of capital.
Main Street Capital’s current Price Target of $95 represents a +102% change from the current price of $47.12.
This high appreciation potential results in an appreciation score of 71 (only 29% of the universe has greater appreciation potential.)
Reinforcing this high Appreciation Score of 71, the moderately high Power Rating of 68 contributes to an Value Trend Rating of B.
Main Street Capital’s current Price Target is $95 (+8% from the 2023 Target of $88 and +102% from the 04/03/24 price of $47.12). This slight rise in the Target is the result of a +11% increase in the equity base and a -3% decrease in the price/equity multiple. The forecasted increase in return on equity has a slight positive impact on the price/equity multiple and the forecasted decline in cost of equity has a slight positive impact as well. More than offsetting these Drivers, the forecasted decline in growth has a slight negative impact.
PTR’s return on equity forecast is 11.4% — in line with our recent forecasts. Forecasted return on equity erratic but little changed between 2015 and 2023. The current forecast is above the 2020 low of 9%.
PTR’s growth forecast is 10.0% — slightly below our recent forecasts. Forecasted growth suffered a dramatic, erratic decline between 2015 and 2023. The current forecast is significantly below the 2015 peak of 20%.
PTR’s cost of equity forecast is 7.2% — in line with recent levels. Forecasted cost of equity enjoyed a dramatic, erratic decline between 2015 and 2023. The current forecast is steady at the 2015 peak of 8.8%.
At Main Street Capital’s current price of $47.12, investors are placing a negative value of $-2 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 13.0% per year, and a return on equity of 11.2% versus a cost of equity of 7.3%.
PTR’s 2025 Price Target of $95 is based on these forecasts and reflects an estimated value of existing assets of $52 and a value of future investments of $43.
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