Analyzing Monroe Capital (NASDAQ:MRCC) and Prospect Capital (NASDAQ:PSEC)

Monroe Capital (NASDAQ:MRCC) and Prospect Capital (NASDAQ:PSEC) are both small-cap finance companies, but which is the superior investment? We will contrast the two businesses based on the strength of their valuation, analyst recommendations, institutional ownership, earnings, dividends, profitability and risk.

Insider & Institutional Ownership

9.1% of Prospect Capital shares are owned by institutional investors. 3.8% of Monroe Capital shares are owned by insiders. Comparatively, 28.0% of Prospect Capital shares are owned by insiders. Strong institutional ownership is an indication that large money managers, endowments and hedge funds believe a stock is poised for long-term growth.

Analyst Ratings

This is a breakdown of current recommendations and price targets for Monroe Capital and Prospect Capital, as reported by MarketBeat.com.

	Sell Ratings	Hold Ratings	Buy Ratings	Strong Buy Ratings	Rating Score
Monroe Capital	0	2	0	0	2.00
Prospect Capital	2	0	0	0	1.00

Monroe Capital presently has a consensus target price of $8.00, suggesting a potential upside of 29.03%. Prospect Capital has a consensus target price of $2.50, suggesting a potential downside of 11.35%. Given Monroe Capital’s stronger consensus rating and higher possible upside, equities analysts plainly believe Monroe Capital is more favorable than Prospect Capital.

Dividends

Monroe Capital pays an annual dividend of $0.72 per share and has a dividend yield of 11.6%. Prospect Capital pays an annual dividend of $0.54 per share and has a dividend yield of 19.1%. Monroe Capital pays out -378.9% of its earnings in the form of a dividend. Prospect Capital pays out -66.7% of its earnings in the form of a dividend. Both companies have healthy payout ratios and should be able to cover their dividend payments with earnings for the next several years.

Volatility & Risk

Monroe Capital has a beta of 0.75, meaning that its share price is 25% less volatile than the S&P 500. Comparatively, Prospect Capital has a beta of 0.9, meaning that its share price is 10% less volatile than the S&P 500.

Valuation and Earnings

This table compares Monroe Capital and Prospect Capital”s gross revenue, earnings per share (EPS) and valuation.

	Gross Revenue	Price/Sales Ratio	Net Income	Earnings Per Share	Price/Earnings Ratio
Monroe Capital	$60.53 million	2.22	$9.70 million	($0.19)	-32.63
Prospect Capital	-$183.55 million	-7.41	-$469.92 million	($0.81)	-3.48

Monroe Capital has higher revenue and earnings than Prospect Capital. Monroe Capital is trading at a lower price-to-earnings ratio than Prospect Capital, indicating that it is currently the more affordable of the two stocks.

Profitability

This table compares Monroe Capital and Prospect Capital’s net margins, return on equity and return on assets.

	Net Margins	Return on Equity	Return on Assets
Monroe Capital	-9.58%	8.49%	3.58%
Prospect Capital	-39.56%	11.91%	5.39%

Summary

Monroe Capital beats Prospect Capital on 8 of the 15 factors compared between the two stocks.

About Monroe Capital

Monroe Capital Corporation is a business development company specializing in customized financing solutions in senior, unitranche and junior secured debt, subordinated debt financing and to a lesser extent, unsecured debt and equity, including equity co-investments in preferred and common stock and warrants. It also provides financing primarily to leveraged buyouts in lower middle-market companies. It focuses to invest in the United States and Canada. The fund prefers to invest in companies with EBITDA between $3 and $35 million. Its makes minority equity investments.

About Prospect Capital

Prospect Capital Corporation is a business development company. It specializes in middle market, mature, mezzanine finance, later stage, emerging growth, leveraged buyouts, refinancing, acquisitions, recapitalizations, turnaround, growth capital, development, capital expenditures and subordinated debt tranches of collateralized loan obligations, cash flow term loans, market place lending and bridge transactions. It also makes real estate investments particularly in multi-family residential real estate asset class. The fund makes secured debt, senior debt, senior and secured term loans, unitranche debt, first-lien and second lien, private debt, private equity, mezzanine debt, and equity investments in private and microcap public businesses. It focuses on both primary origination and secondary loans/portfolios and invests in situations like debt financings for private equity sponsors, acquisitions, dividend recapitalizations, growth financings, bridge loans, cash flow term loans, real estate financings/investments. It also focuses on investing in small-sized and medium-sized private companies rather than large public companies. The fund typically invests across all industry sectors, with a particular expertise in the energy and industrial sectors. It invests in aerospace and defense, chemicals, conglomerate services, consumer services, ecological, electronics, financial services, machinery, manufacturing, media, pharmaceuticals, retail, software, specialty minerals, textiles and leather, transportation, oil and gas production, coal production, materials, industrials, consumer discretionary, information technology, utilities, pipeline, storage, power generation and distribution, renewable and clean energy, oilfield services, healthcare, food and beverage, education, business services, and other select sectors. It prefers to invest in the United States and Canada. The fund seeks to invest between $10 million to $500 million per transaction in companies with EBITDA between $5 million and $150 million, sales value between $25 million and $500 million, and enterprise value between $5 million and $1000 million. It fund also co-invests for larger deals. The fund seeks control acquisitions by providing multiple levels of the capital structure. The fund focuses on sole, agented, club, or syndicated deals.