$PSEC Q3 2022 Earnings Report

$PSEC Long

Prospect Capital is a leading business development company (BDC) that makes debt and equity investments in U.S. middle market businesses across a range of industries. In summary, BDCs provide benefits to the American economy by providing an alternative source of capital for small-sized and medium-sized private companies. They also take less tax on income for shareholders. Currently speaking, they have $7.5B in assets under management which makes them one of the biggest BDCs. Prospect Capital also has 127 current portfolio companies across 39 separate industries which makes their investments very diverse and is one of the reasons I want to long them. If it was any other investment company, I would have most likely shorted them however, I believe the opposite for Prospect. Firstly speaking, during the past two years the company hasn’t missed any earnings estimates and for an investment company, it is considered a highly good thing. They were able to go through the pandemic and now the recession without having any bad effect on their financials. This makes me believe that the company’s foundation and business strategies are very strong. Especially also considering the fact that much bigger competitors such as JP Morgan weren’t able to beat the estimates. Additionally, I believe that inflation will become an advantage for them due to higher prepayment activity from increased prices which will make the total investment income higher. Moreover, with the recent price increases in the LIBOR rates, Prospect Capital’s debt investments are also likely to be positively impacted as their interest rates are based on LIBOR rates. Having all those in mind, Prospect has an average of beating the estimates and delivering 11% over the expected amount each quarter. During this quarter, their EPS is expected to be 0.19 which I believe will be a very easy beat for them. The last time they delivered an EPS below 0.19 was back in 2020 however even before that, they had constantly delivered an EPS over that number since 2018. Now considering that this is an end-of-year report for them that summarizes everything during the year, let’s take a look at how some of their investments are doing. ● NII is up 18% from a year ago, and now sustained over 20 cents for 3 straight quarters. A dividend coverage is now at 123%. ● NAV per share up 15% even after Prospect Capital paid its 9% monthly dividends. ● Total debt up 20% from a year ago, but Debt to Equity falling from a year ago and below 55%. This is the lowest debt to equity in the BDC space. ● Unsecured debt is still over 70% of the capital stack, one of the best in the BDC space To compare Prospect’s debt to their top competitors, here are their information: Debt from 2015-today Prospect Capital - 9% decrease in debt Ares Capital - 350% increase in debt Main Street Capital - 240% increase in debt Sixth Street Specialty Lending - a 200% increase in debt Prospect Capital is also a bit different than many other BDCs as they also invest directly in equity positions of some of their portfolio companies. Currently speaking, Prospect Capital's top 5 holdings have increased in value by about 25% from a year ago. This is the best performance in the BDC space. Also considering the fact that these top 5 equity positions are a large % of their total equity holdings. Of the top 5 holdings, their largest investment is in National Property REIT Corp or NPRC. NPRC's real estate portfolio consists of equity investments in 58 properties in 47 cities, across 19 states, with more than 20.6 million rentable square feet and more than 22,000 units. So basically, NPRC is a multifamily housing REIT. Again, this goes back to them having very diverse investments. With mortgage rates rising a record 24% in just 1 month after the Federal Reserve announced its rates to move higher, these much higher costs for buying a home have caused a severe housing bubble, forcing many potential home buyers into the rental market and NPRC has seen a very positive impact from that. This is also great for Prospect Capital, as they have seen a 40% increase in value from its investment in NPRC. Why I could be wrong: As we are going through a recession right now, many companies are dropping in value which in return is also having a negative impact on their investors. Some of the biggest Banks in America such as JPMorgan were badly affected by this even though they were more than prepared. At the same time, Prospect mostly invests in new start-ups which would make it even harder for the company to do well in the environment we are in right now. All of these could add up to Prospect not being able to beat the revenue estimates. Market Cap: 3,049,600,253 P/E Ratio: 3.54 Initial reaction: Long Researched reaction: Long CEO: Time: After open Estimate: +3%