Reviewing Capitala Finance (CPTA) and Capital Southwest (CSWC)

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

Institutional & Insider Ownership

56.6% of Capital Southwest shares are owned by institutional investors. Comparatively, 17.5% of Capitala Finance shares are owned by institutional investors. 5.9% of Capital Southwest shares are owned by company insiders. Comparatively, 9.1% of Capitala Finance shares are owned by company insiders. Strong institutional ownership is an indication that large money managers, endowments and hedge funds believe a company is poised for long-term growth.



Risk & Volatility

Capital Southwest has a beta of 0.3, meaning that its stock price is 70% less volatile than the S&P 500. Comparatively, Capitala Finance has a beta of 0.95, meaning that its stock price is 5% less volatile than the S&P 500.

Dividends

Capital Southwest pays an annual dividend of $1.12 per share and has a dividend yield of 6.8%. Capitala Finance pays an annual dividend of $1.00 per share and has a dividend yield of 12.8%. Capital Southwest pays out 183.6% of its earnings in the form of a dividend, suggesting it may not have sufficient earnings to cover its dividend payment in the future. Capitala Finance pays out 102.0% of its earnings in the form of a dividend, suggesting it may not have sufficient earnings to cover its dividend payment in the future. Capitala Finance is clearly the better dividend stock, given its higher yield and lower payout ratio.

Analyst Recommendations

This is a breakdown of recent ratings for Capital Southwest and Capitala Finance, as reported by MarketBeat.

Sell Ratings Hold Ratings Buy Ratings Strong Buy Ratings Rating Score
Capital Southwest 0 1 4 0 2.80
Capitala Finance 0 4 1 0 2.20

Capital Southwest currently has a consensus price target of $20.00, suggesting a potential upside of 20.70%. Capitala Finance has a consensus price target of $13.50, suggesting a potential upside of 72.41%. Given Capitala Finance’s higher probable upside, analysts clearly believe Capitala Finance is more favorable than Capital Southwest.

Valuation and Earnings

This table compares Capital Southwest and Capitala Finance’s top-line revenue, earnings per share (EPS) and valuation.

Gross Revenue Price/Sales Ratio Net Income Earnings Per Share Price/Earnings Ratio
Capital Southwest $23.50 million 11.42 $23.47 million $0.61 27.16
Capitala Finance $51.09 million 2.45 -$6.98 million $0.98 7.99

Capital Southwest has higher earnings, but lower revenue than Capitala Finance. Capitala 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 Capital Southwest and Capitala Finance’s net margins, return on equity and return on assets.

Net Margins Return on Equity Return on Assets
Capital Southwest 91.90% 5.46% 4.45%
Capitala Finance -14.13% 6.64% 2.81%

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 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, EBITDA between $3 million and $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.

Capitala Finance Company Profile

Capitala Finance Corp. is a Business Development Company specializing in traditional mezzanine, senior subordinated and unitranche debt, first-lien and second-lien loans, equity investments in sponsored and non-sponsored lower and traditional middle market companies. The fund targets companies in the business services, commercial and professional services, manufacturing, consumer and retail, energy, and health-care industries. It typically considers investments in the United States. The fund invests $5 million and $50 million per transaction in companies with greater than $4.5 million of TTM EBITDA. It may also invest in senior secured positions in "stretch" senior secured loans. The fund makes minority equity co-investments, alongside management or financial sponsors.

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