Main Street Capital: Earnings Stand Out From the Crowd

Main Street Capital's (MAIN 0.85%) third-quarter report stands as one of the industry's best so far. The company reported net investment income of $0.60 per share, covering its regular $0.19 monthly dividend ($0.57 per quarter).

Source: Press release.

Here's what shareholders of the best-performing business development company (BDC) should know now.

Some big portfolio movers

With 195 companies in Main Street's portfolio, it's difficult to keep tabs on all of them, but investors should spend some time familiarizing themselves with the outliers.

CBT Nuggets sticks out as a big winner yet again. The online IT training company was written up by $5.9 million this quarter, bringing gains for the first nine months of 2017 up to $16.4 million. The company is now marked at a value of $71.9 million, not bad considering Main Street's cost basis stands at $1.3 million. 

As a group, Main Street Capital's Texas-based investments seemed to have mostly escaped Hurricane Harvey in good health. Only one of the investments outlined in an article on Main Street Capital's Hurricane Harvey exposure had what I'd consider a noteworthy decline in value. That investment was American Shooting Centers (ASC Interests), which still has a Harvey notice on its website about changed hours of operations and a broken phone system due to weather. I'll be keeping an eye on this cohort as time goes on.

Image source: Getty Images.

Now for the bad news: Main Street Capital's investments in CapFusion and GST Autoleather turned for the worse. CapFusion is a small business lender that was added to the portfolio in early 2016. Carried at cost last quarter, it was marked down to 58% of cost this quarter. It's a mere rounding error in terms of the whole portfolio, but the rather rapid decline in value sticks out.

An investment in automotive leather manufacturer GST Autoleather was marked down to about 80% of cost this quarter. The company filed for Chapter 11 bankruptcy in October. It's worth following closely, but given it makes up only about 1% of book value, it's not particularly meaningful to Main Street Capital's results. (Count your blessings -- GST Autoleather was a relative disaster for Triangle Capital, which holds subordinated debt in the company.)

Main Street Capital experienced only a modest net gain across its portfolio, which added less than a penny to earnings on a per-share basis. Winners papered over the losers, which is the ideal outcome for any business development company.

Talk about tax reform

Whereas most BDCs invest the overwhelming majority of their investment portfolios in debt, Main Street Capital is a heavy equity investor, holding ownership stakes in 70 different small businesses in its lower middle market portfolio. That makes Main Street Capital more exposed to corporate tax policies than other BDCs.

Taxation, a favorite point of discussion for Main Street Capital's CEO, Vincent Foster, stole the show on the conference call. In summary, tax reform as proposed in Congress would have a "low to mid-single-digit" positive impact on Main Street Capital's book value, as a lower tax rate would result in higher earnings for many of its portfolio companies, resulting in higher valuations. He noted that tax overhaul would have little impact to Main Street Capital's earnings power from dividend income, however.

Given some of the poor earnings reports coming out of BDCs this quarter, shareholders should be happy with Main Street Capital's relatively unexciting third quarter.