Main Street Capital Corporation (MAIN 0.23%) reported earnings after the market closed last Thursday, only to tank at the open on Friday. By the end of last week, shares were trading at prices 4% off Thursday's close.
A relatively strong quarter
Main Street Capital posted good first-quarter results last Thursday. The company reported a net asset value of $20.14, a $0.25 per-share increase quarter over quarter. The company easily covered dividends with net investment income, earning $0.52 per share vs. first-quarter dividends of $0.495 per share.
Importantly, the company also reported that its secondary offering in April was highly accretive to current shareholders. On the conference call, CEO Vincent Foster suggested that the secondary would add $1.06 per share in net asset value. Thus, Main Street Capital's current NAV is probably in the range of $21.20 per share.
Looking at the marks
Main Street Capital's loan book looks even better after the sale of one distressed asset. From the conference call, we find that Main Street exited an investment in Integrated Printing Solutions at a price only slightly lower than its December valuation. Integrated Printing Solutions and Quality Lease and Rental Holdings were on non-accrual status at the end of March and December.
These two losers are offset by many of the top-performing companies in Main Street Capital's portfolio. CEO Vince Foster noted that two of its portfolio companies were currently on the market for a sale, and that the valuations were "nowhere near how we're marking them," suggesting there could be more gains to come from the sale of portfolio companies.
It left me to speculate which assets Foster might be talking about. One may be its highly profitable investment in CBT Nuggets, a company that provides IT training videos over the Internet. This has been a proverbial gold mine, enjoying write ups in seemingly every quarter since it was added to the portfolio.
This home-run investment is now valued at $18.5 million against a cost basis of only $1.3 million. The chart below shows the very rapid growth in the value of the company on Main Street Capital's books:
Source: SEC filings.
Another big winner is its investment advisory agreement to manage the assets of a private BDC. The BDC is currently raising funds at a rate of "$1 million per day," up from $5-6 million per month in the second quarter of 2013.
Main Street Capital earns management fees equal to 1% of assets per year, plus 10% of all gains over the hurdle rate of 7.5% per year for managing the fund. It recorded the first dividend of $300,000 this quarter, which helped the company reduce its ongoing administrative and personnel costs. Main Street Capital more than doubled the carrying value of its asset manager in the first quarter, writing it up to a value of $2.3 million.
Going forward
Main Street has temporarily placed the proceeds of its secondary offering in highly liquid bank loans and middle-market debt investments. As the year trudges forward, Main Street Capital will redeploy this capital in its lower middle market portfolio, where it earns the highest returns. When reallocated, Main Street Capital will be "in a position to recommend a dividend increase" to its board of directors.
Trading at roughly 1.4 times net asset value, Main Street Capital is no bargain in the world of BDCs. However, the company's impressive portfolio performance and excellent record with lower middle-market investments is worthy of some premium to NAV. The lower middle market portfolio currently yields 15.1% per year.
Shares are a good value relative to other BDCs. Including special dividends expected in 2014, the stock yields about 8.6% per year. That seems fair for a company with a better-than-average cost structure, portfolio yield, and track record.
