New Mountain Finance (NYSE:NMFC) and Capital Southwest (NASDAQ:CSWC) are both small-cap finance companies, but which is the superior stock? We will contrast the two companies based on the strength of their valuation, profitability, risk, earnings, institutional ownership, analyst recommendations and dividends.

Insider and Institutional Ownership

34.7% of New Mountain Finance shares are owned by institutional investors. Comparatively, 48.5% of Capital Southwest shares are owned by institutional investors. 10.5% of New Mountain Finance shares are owned by company insiders. Comparatively, 6.8% of Capital Southwest shares are owned by company insiders. Strong institutional ownership is an indication that hedge funds, endowments and large money managers believe a stock is poised for long-term growth.

Valuation and Earnings

This table compares New Mountain Finance and Capital Southwest’s gross revenue, earnings per share (EPS) and valuation.

Gross Revenue Price/Sales Ratio Net Income Earnings Per Share Price/Earnings Ratio
New Mountain Finance $231.46 million 5.12 $72.35 million $1.38 9.81
Capital Southwest $51.88 million 7.44 $33.06 million $1.42 15.36

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

Profitability

This table compares New Mountain Finance and Capital Southwest’s net margins, return on equity and return on assets.

Net Margins Return on Equity Return on Assets
New Mountain Finance 36.54% 10.47% 4.23%
Capital Southwest 53.87% 8.27% 4.91%

Dividends

New Mountain Finance pays an annual dividend of $1.36 per share and has a dividend yield of 10.0%. Capital Southwest pays an annual dividend of $1.56 per share and has a dividend yield of 7.2%. New Mountain Finance pays out 98.6% of its earnings in the form of a dividend, suggesting it may not have sufficient earnings to cover its dividend payment in the future. Capital Southwest pays out 109.9% of its earnings in the form of a dividend, suggesting it may not have sufficient earnings to cover its dividend payment in the future. Capital Southwest has raised its dividend for 3 consecutive years. New Mountain Finance is clearly the better dividend stock, given its higher yield and lower payout ratio.

Volatility and Risk

New Mountain Finance has a beta of 0.54, meaning that its stock price is 46% less volatile than the S&P 500. Comparatively, Capital Southwest has a beta of 0.2, meaning that its stock price is 80% less volatile than the S&P 500.

Analyst Recommendations

This is a summary of recent ratings and target prices for New Mountain Finance and Capital Southwest, as provided by MarketBeat.com.

Sell Ratings Hold Ratings Buy Ratings Strong Buy Ratings Rating Score
New Mountain Finance 0 0 1 0 3.00
Capital Southwest 0 1 2 0 2.67

New Mountain Finance presently has a consensus price target of $14.00, indicating a potential upside of 3.40%. Capital Southwest has a consensus price target of $23.33, indicating a potential upside of 6.98%. Given Capital Southwest’s higher possible upside, analysts clearly believe Capital Southwest is more favorable than New Mountain Finance.

Summary

Capital Southwest beats New Mountain Finance on 9 of the 17 factors compared between the two stocks.

New Mountain Finance Company Profile

New Mountain Finance Corporation is a Business Development Company specializing in investments in middle market companies and debt securities at various levels of the capital structure, including first and second lien debt, unsecured notes, bonds, and mezzanine securities. It invests in various industries that include software, education, business services, distribution and logistics, federal services, healthcare services and products, healthcare facilities, energy, media, consumer and industrial services, healthcare Information Technology, Information Technology and services, specialty chemicals and materials, telecommunication, retail, and power generation. It seeks to invest in United States. It typically invests between $10 million and $50 million. Within middle market it seeks to invest in companies having EBITDA between $20 million and $200 million. It prefers to invest in equity interests, such as preferred stock, common stock, warrants, or options received in connection with its debt investments and directly in the equity of private companies. The fund makes investments through both primary originations and open-market secondary purchases. It invests primarily in debt securities that are rated below investment grade and have contractual unlevered returns of 10% to 15%. The firm may also invest in distressed debt and related opportunities and prefers to invest in targets having private equity sponsorship. It seeks to hold its investments between five years and ten years. The fund prefer to have majority stake in companies.

Capital Southwest Company Profile

Capital Southwest Corporation is a business development company specializing in credit and private equity and venture capital investments in middle market companies, mezzanine, later stage, mature, late venture, emerging growth, buyouts, recapitalizations and growth capital investments. It does not invest in startups, publicly traded companies, real estate developments, project finance opportunities, oil and gas exploration businesses, troubled companies, turnarounds, and companies in which significant senior management is departing. In lower middle market, the firm typically invests in growth financing, bolt-on acquisitions, new platform acquisitions, refinancing, dividend recapitalizations, sponsor-led buyouts, and management buyouts situations. The investment structures are Unitranche debt, subordinated debt, senior debt, first and second lien debt, and preferred and common equity. The firm makes equity co-investments alongside debt investments, up to 20% of total check and only makes non-control investments. It prefers to invest in Industrial manufacturing and services, value-added distribution, healthcare products and services, business services, specialty chemicals, food and beverage, tech-enabled services and SaaS models. The firm seeks to invest in energy services and products, industrial technologies, and specialty chemicals and products. Within energy services and products, the firm seeks to invest in each segment of the industry, including upstream, midstream and downstream, excluding exploration and production with a focus on differentiated products and services, equipment and tool rental, consumable products, and drilling and completion chemicals. Within industrial technologies, it seeks to invest in automation and process controls, handling and packaging equipment, industrial filtration and fluid handling, measurement, monitoring and testing, professional tools, and sensors and instrumentation. Within and specialty chemicals and products, the firm seeks to invest in businesses that develop and manufacture highly differentiated chemicals and products including adhesives, coatings and sealants, catalysts and absorbents, cosmeceuticals, fine chemicals, flavors and fragrances, performance lubricants, polymers, plastics and composites, chemical dispensing and filtration equipment, professional and industrial trade consumables and tools, engineered solutions for HVAC, plumbing, and electrical installations, specified high performance materials for fire protection and oilfield applications. It may also invest in exceptional opportunities in building products. The firm seeks to invest in the United States. The firm seeks to make investments ranging from $5 to $25 million in securities. It seeks to make equity investments up to $5 million and debt investments between $5 million and $20 million and co-invest in transaction size upto $40 million. It prefers to invest in companies with revenues approaching above $10 million, profitable operations, historical growth rate of at least 15 percent per year. . Within the lower middle market, it seeks to invest in with less than $15 million in EBITDA and also opportunistically invests in the upper middle market, generally defined as companies with EBITDA in excess of $50 million. In addition to making direct investments, the firm allocates capital to syndicated first and second lien term loans in the upper middle market. Criteria for Upper Middle Market Syndicated 1st Lien is EBITDA Size more than $30 million, Closing Leverage greater than 4 times, investment hold size between $5 million and $7 million, investment yield greater than 6.5%. Criteria for Upper Middle Market Syndicated 2nd Lien is EBITDA Size more than $50 million, Closing Leverage greater than 6 times, investment hold size between $5 million and $7 million, investment yield greater than 9%. It prefers to take a majority and minority stake. The firm has the flexibility to hold investments for very long period in its portfolio companies. It may also invest through warrants. The firm prefers to take Board participation in its portfolio companies. Capital Southwest Corporation was founded on April 19, 1961 and is based in Dallas, Texas.

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