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3 SBIC & Commercial Finance Stocks From the Flourishing Industry
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The Zacks SBIC & Commercial Finance industry will continue to bear the brunt of higher prepayments as interest rates rise. This is likely to keep hurting the industry players’ profitability to some extent.
Yet, high interest rates, favorable regulatory changes and steady demand for personalized financing solutions are expected to support industry players in the coming days. Solid asset quality continues to act as a major tailwind. Hence, a few industry names like Blackstone Secured Lending Fund (BXSL - Free Report) , Main Street Capital Corporation (MAIN - Free Report) and Hercules Capital, Inc. (HTGC - Free Report) are likely to gain from these favorable developments.
About the Industry
The Zacks SBIC & Commercial Finance industry comprises companies that provide finance to small and mid-sized privately held developing firms. These firms are typically underserved by traditional banks and other lenders. Additionally, firms suffering from financial distress are the primary target clients of these lenders. The industry players provide customized financing solutions, ranging from senior-debt instruments to equity capital. This financing is provided for a change of ownership transactions, strategic buyouts, recapitalizations and growth initiatives in partnership with business owners, management teams and financial sponsors, among others. Some of the other products offered by the industry participants are mezzanine loans that typically pay high-interest rates and could be converted into equity in the target firm.
3 Major Factors Shaping the Future of SBIC & Commercial Finance Industry
High Rates:The Federal Reserve aggressively raised interest rates last year, with the rates currently at a 15-year high of 5-5.25%. Though the central bank paused the hike in the June FOMC meeting as inflation continued to cool down, it has kept the door open for further hikes in the near term. While rising rates led to a spike in prepayments and refinancing, higher rates will keep benefiting SBIC & Commercial Finance industry players. The demand for products and services offered by these companies is likely to keep growing amid the challenging macroeconomic backdrop. Thus, the industry players are expected to witness a decent improvement in revenues going forward.
Solid Asset Quality: Following the COVID-19 outbreak and a subsequent halt in business activities in 2020, the majority of sectors wherein SBIC & Commercial Finance companies provide loans were hit hard. This raised fears of a deterioration of asset quality for industry players. But the support from the administration in the form of stimulus packages, extensive vaccination drives and the re-opening of businesses supported economic growth and prevented a substantial rise in delinquency rates for the industry players. Even now, the industry players are not expected to witness much deterioration in credit quality though high inflation and rates remain major near-term headwinds.
Regulatory Changes: In 2018, an amendment to the Investment Company Act of 1940 by the Small Business Credit Availability Act eased leverage limits for such companies, allowing them to increase their debt-to-equity leverage to 2:1 from 1:1. This helped these companies to reduce portfolio risks by investing in higher capital structures without foregoing current returns. Thus, the act provided extra funding flexibility to these companies and will continue offering more growth opportunities.
Zacks Industry Rank Indicates Brighter Prospects
The Zacks SBIC & Commercial Finance industry is a 34-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #70, which places it in the top 28% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates outperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of an encouraging earnings outlook for the constituent companies in aggregate. Looking at aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s bottom-line growth potential. Over the past year, the industry’s earnings estimates for the current year have been revised 20.2% upward.
So, we are presenting a few stocks that are well-positioned to outperform the market based on a strong earnings outlook. Before that, let’s check out the industry’s recent stock market performance and valuation picture.
Industry Outperforms Sector and S&P 500
The Zacks SBIC & Commercial Finance industry has outperformed both the S&P 500 composite and its own sector over the past three years.
The stocks in this industry have collectively gained 42.9% over this period, while the Zacks S&P 500 composite and the Zacks Finance sector have rallied 40.1% and 33.3%, respectively.
Three-Year Price Performance
Industry's Current Valuation
One might get a good sense of the industry’s relative valuation by looking at its price-to-tangible book ratio (P/TBV), which is commonly used for valuing loan providers because of large variations in their earnings results from one quarter to the next.
The industry currently has a trailing 12-month P/TB of 0.87X. The highest level of 1.03X, lowest of 0.41X and a median of 0.90X have been recorded by the industry over the past five years. Also, the industry is trading at a significant discount compared with the market at large, as evident from the trailing 12-month P/TB for the S&P 500 composite of 10.48X, as the chart below shows.
Price-to-Tangible Book Ratio (TTM)
As finance stocks typically have a low P/TB ratio, comparing SBIC & commercial loan providers with the S&P 500 may not make sense to many investors. However, a comparison of the group’s P/TB ratio with that of its broader sector ensures that the group is trading at a solid discount. The Zacks Finance sector’s trailing 12-month P/TB of 4.29X is also way above the Zacks SBIC & Commercial Finance industry’s ratio, as the chart below shows.
Price-to-Tangible Book Ratio (TTM)
3 SBIC & Commercial Finance Stocks Worth Buying
Blackstone Secured: This Zacks Rank #2 (Buy) stock primarily invests in the first lien senior secured debt of private U.S. companies. Based in New York, the company is externally managed by Blackstone Credit BDC Advisors LLC.
As of Mar 31, 2023, Blackstone Secured had total investments (fair value) of $9.63 billion in 181 portfolio companies and a net asset value (NAV) per share of $26.10. As of the same date, the company had cash and cash equivalents of $103 million. Further, at March 2023-end, BXSL had $5.45 billion in outstanding debt, with negligible maturities in the near term.
Also, BXSL has investment grade corporate credit ratings of Baa3/BBB- and a stable outlook from Moody’s and S&P, respectively, and BBB- ratings and a positive outlook from Fitch. This renders it favorable access to the debt market.
Since its 2021 initial public offering (IPO), Blackstone Secured has regularly raised its quarterly dividends. The company also pays special dividends. The last hike in dividend was announced in June when it raised the quarterly payout by 10% to 77 cents per share.
The company’s shares have gained 17.4% over the past year. The Zacks Consensus Estimate for current-year earnings has moved marginally north to $3.80 over the past month. BXSL has a market cap of $4.5 billion.
Price and Consensus: BXSL
Main Street Capital: This Zacks Rank #2 private equity firm specializes in providing equity capital to lower-middle-market (LMM) companies. Main Street Capital also offers debt capital to middle-market companies. Based in Houston, TX, MAIN invests in LMM companies that generate annual revenues between $10 million and $150 million.
As of Mar 31, 2023, Main Street Capital had total investments (fair value) of $3.91 billion in 195 portfolio companies, which consisted of investments in the LMM portfolio, the middle-market portfolio and the private loan portfolio. As of the same date, MAIN’s NAV was $27.23 per share.
At the end of the March quarter, Main Street Capital had total liquidity of $710.8 million, which included $39.8 million in cash and cash equivalents and $671 million of unused capacity under its revolving credit facility. As of Mar 31, 2023, MAIN had total debt worth $1.4 billion, consisting of debentures and senior notes.
Since its October 2007 IPO, Main Street Capital has regularly raised its monthly dividends. Cumulatively, dividends paid or declared since IPO through the third quarter of 2023 stand at $37.56 per share.
Main Street Capital has a market cap of $3.2 billion. Over the past 12 months, MAIN’s stock has declined 1.5%. The Zacks Consensus Estimate for earnings has been revised almost 1% upward to $3.99 for 2023 over the past 30 days.
Price and Consensus: MAIN
Hercules Capital: Headquartered in Palo Alto, CA, HTGC is a specialty finance company that provides venture capital to technology and life science-related companies. Its investments are generally between $15.0 million and $40.0 million, and it expects these to generate revenues within at least two to four years.
Despite the tough macroeconomic scenario, Hercules Capital is expected to continue witnessing the growing demand for customized financing from private equity firms and venture capitalists. The company maintains a robust balance sheet position. HTGC’s concentrated focus on its credit performance is encouraging. Driven by the rise in the demand for customized financing and a robust deal pipeline, total new commitments are expected to keep increasing.
As of Mar 31, 2023, it had $553.1 million in liquidity, including $71.1 million in unrestricted cash and cash equivalents, and $482 million in credit facilities. Also, the company has long-term issuer ratings of BBB- and Baa3 from Fitch and Moody’s, respectively, along with a stable outlook, which renders it favorable access to the debt market. At the end of the first quarter of 2023, the weighted average cost of debt, comprising interest and fees, was 4.7%.
The fair value of Hercules Capital’s total investment portfolio was $3.13 billion as of Mar 31, 2023. Net asset value was $10.82 per share on the same date.
Hercules Capital’s capital deployment plan seems impressive. In February, the company raised its dividend by 8.3% to 39 cents per share. In the past five years, it increased its dividend 12 times. Management revisits its dividend policy at the end of every quarter and determines if any changes are required.
Hercules Capital has a market cap of $2.2 million. Shares of this Zacks Rank #2 company have rallied 12.9% over the past year. The Zacks Consensus Estimate for 2023 earnings has remained unchanged at $1.94 over the past month.
Price and Consensus: HTGC
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3 SBIC & Commercial Finance Stocks From the Flourishing Industry
The Zacks SBIC & Commercial Finance industry will continue to bear the brunt of higher prepayments as interest rates rise. This is likely to keep hurting the industry players’ profitability to some extent.
Yet, high interest rates, favorable regulatory changes and steady demand for personalized financing solutions are expected to support industry players in the coming days. Solid asset quality continues to act as a major tailwind. Hence, a few industry names like Blackstone Secured Lending Fund (BXSL - Free Report) , Main Street Capital Corporation (MAIN - Free Report) and Hercules Capital, Inc. (HTGC - Free Report) are likely to gain from these favorable developments.
About the Industry
The Zacks SBIC & Commercial Finance industry comprises companies that provide finance to small and mid-sized privately held developing firms. These firms are typically underserved by traditional banks and other lenders. Additionally, firms suffering from financial distress are the primary target clients of these lenders. The industry players provide customized financing solutions, ranging from senior-debt instruments to equity capital. This financing is provided for a change of ownership transactions, strategic buyouts, recapitalizations and growth initiatives in partnership with business owners, management teams and financial sponsors, among others. Some of the other products offered by the industry participants are mezzanine loans that typically pay high-interest rates and could be converted into equity in the target firm.
3 Major Factors Shaping the Future of SBIC & Commercial Finance Industry
High Rates: The Federal Reserve aggressively raised interest rates last year, with the rates currently at a 15-year high of 5-5.25%. Though the central bank paused the hike in the June FOMC meeting as inflation continued to cool down, it has kept the door open for further hikes in the near term. While rising rates led to a spike in prepayments and refinancing, higher rates will keep benefiting SBIC & Commercial Finance industry players. The demand for products and services offered by these companies is likely to keep growing amid the challenging macroeconomic backdrop. Thus, the industry players are expected to witness a decent improvement in revenues going forward.
Solid Asset Quality: Following the COVID-19 outbreak and a subsequent halt in business activities in 2020, the majority of sectors wherein SBIC & Commercial Finance companies provide loans were hit hard. This raised fears of a deterioration of asset quality for industry players. But the support from the administration in the form of stimulus packages, extensive vaccination drives and the re-opening of businesses supported economic growth and prevented a substantial rise in delinquency rates for the industry players. Even now, the industry players are not expected to witness much deterioration in credit quality though high inflation and rates remain major near-term headwinds.
Regulatory Changes: In 2018, an amendment to the Investment Company Act of 1940 by the Small Business Credit Availability Act eased leverage limits for such companies, allowing them to increase their debt-to-equity leverage to 2:1 from 1:1. This helped these companies to reduce portfolio risks by investing in higher capital structures without foregoing current returns. Thus, the act provided extra funding flexibility to these companies and will continue offering more growth opportunities.
Zacks Industry Rank Indicates Brighter Prospects
The Zacks SBIC & Commercial Finance industry is a 34-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #70, which places it in the top 28% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates outperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of an encouraging earnings outlook for the constituent companies in aggregate. Looking at aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s bottom-line growth potential. Over the past year, the industry’s earnings estimates for the current year have been revised 20.2% upward.
So, we are presenting a few stocks that are well-positioned to outperform the market based on a strong earnings outlook. Before that, let’s check out the industry’s recent stock market performance and valuation picture.
Industry Outperforms Sector and S&P 500
The Zacks SBIC & Commercial Finance industry has outperformed both the S&P 500 composite and its own sector over the past three years.
The stocks in this industry have collectively gained 42.9% over this period, while the Zacks S&P 500 composite and the Zacks Finance sector have rallied 40.1% and 33.3%, respectively.
Three-Year Price Performance
Industry's Current Valuation
One might get a good sense of the industry’s relative valuation by looking at its price-to-tangible book ratio (P/TBV), which is commonly used for valuing loan providers because of large variations in their earnings results from one quarter to the next.
The industry currently has a trailing 12-month P/TB of 0.87X. The highest level of 1.03X, lowest of 0.41X and a median of 0.90X have been recorded by the industry over the past five years. Also, the industry is trading at a significant discount compared with the market at large, as evident from the trailing 12-month P/TB for the S&P 500 composite of 10.48X, as the chart below shows.
Price-to-Tangible Book Ratio (TTM)
As finance stocks typically have a low P/TB ratio, comparing SBIC & commercial loan providers with the S&P 500 may not make sense to many investors. However, a comparison of the group’s P/TB ratio with that of its broader sector ensures that the group is trading at a solid discount. The Zacks Finance sector’s trailing 12-month P/TB of 4.29X is also way above the Zacks SBIC & Commercial Finance industry’s ratio, as the chart below shows.
Price-to-Tangible Book Ratio (TTM)
3 SBIC & Commercial Finance Stocks Worth Buying
Blackstone Secured: This Zacks Rank #2 (Buy) stock primarily invests in the first lien senior secured debt of private U.S. companies. Based in New York, the company is externally managed by Blackstone Credit BDC Advisors LLC.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
As of Mar 31, 2023, Blackstone Secured had total investments (fair value) of $9.63 billion in 181 portfolio companies and a net asset value (NAV) per share of $26.10. As of the same date, the company had cash and cash equivalents of $103 million. Further, at March 2023-end, BXSL had $5.45 billion in outstanding debt, with negligible maturities in the near term.
Also, BXSL has investment grade corporate credit ratings of Baa3/BBB- and a stable outlook from Moody’s and S&P, respectively, and BBB- ratings and a positive outlook from Fitch. This renders it favorable access to the debt market.
Since its 2021 initial public offering (IPO), Blackstone Secured has regularly raised its quarterly dividends. The company also pays special dividends. The last hike in dividend was announced in June when it raised the quarterly payout by 10% to 77 cents per share.
The company’s shares have gained 17.4% over the past year. The Zacks Consensus Estimate for current-year earnings has moved marginally north to $3.80 over the past month. BXSL has a market cap of $4.5 billion.
Price and Consensus: BXSL
Main Street Capital: This Zacks Rank #2 private equity firm specializes in providing equity capital to lower-middle-market (LMM) companies. Main Street Capital also offers debt capital to middle-market companies. Based in Houston, TX, MAIN invests in LMM companies that generate annual revenues between $10 million and $150 million.
As of Mar 31, 2023, Main Street Capital had total investments (fair value) of $3.91 billion in 195 portfolio companies, which consisted of investments in the LMM portfolio, the middle-market portfolio and the private loan portfolio. As of the same date, MAIN’s NAV was $27.23 per share.
At the end of the March quarter, Main Street Capital had total liquidity of $710.8 million, which included $39.8 million in cash and cash equivalents and $671 million of unused capacity under its revolving credit facility. As of Mar 31, 2023, MAIN had total debt worth $1.4 billion, consisting of debentures and senior notes.
Since its October 2007 IPO, Main Street Capital has regularly raised its monthly dividends. Cumulatively, dividends paid or declared since IPO through the third quarter of 2023 stand at $37.56 per share.
Main Street Capital has a market cap of $3.2 billion. Over the past 12 months, MAIN’s stock has declined 1.5%. The Zacks Consensus Estimate for earnings has been revised almost 1% upward to $3.99 for 2023 over the past 30 days.
Hercules Capital: Headquartered in Palo Alto, CA, HTGC is a specialty finance company that provides venture capital to technology and life science-related companies. Its investments are generally between $15.0 million and $40.0 million, and it expects these to generate revenues within at least two to four years.
Despite the tough macroeconomic scenario, Hercules Capital is expected to continue witnessing the growing demand for customized financing from private equity firms and venture capitalists. The company maintains a robust balance sheet position. HTGC’s concentrated focus on its credit performance is encouraging. Driven by the rise in the demand for customized financing and a robust deal pipeline, total new commitments are expected to keep increasing.
As of Mar 31, 2023, it had $553.1 million in liquidity, including $71.1 million in unrestricted cash and cash equivalents, and $482 million in credit facilities. Also, the company has long-term issuer ratings of BBB- and Baa3 from Fitch and Moody’s, respectively, along with a stable outlook, which renders it favorable access to the debt market. At the end of the first quarter of 2023, the weighted average cost of debt, comprising interest and fees, was 4.7%.
The fair value of Hercules Capital’s total investment portfolio was $3.13 billion as of Mar 31, 2023. Net asset value was $10.82 per share on the same date.
Hercules Capital’s capital deployment plan seems impressive. In February, the company raised its dividend by 8.3% to 39 cents per share. In the past five years, it increased its dividend 12 times. Management revisits its dividend policy at the end of every quarter and determines if any changes are required.
Hercules Capital has a market cap of $2.2 million. Shares of this Zacks Rank #2 company have rallied 12.9% over the past year. The Zacks Consensus Estimate for 2023 earnings has remained unchanged at $1.94 over the past month.
Price and Consensus: HTGC
