3 SBIC & Commercial Finance Stocks to Watch Despite Industry Woes

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3 SBIC & Commercial Finance Stocks to Watch Despite Industry Woes

Zacks08-29

The Zacks SBIC & Commercial Finance industry will continue to benefit from favorable regulatory changes and a rise in demand for personalized financing solutions as rates come down. However, gradual ...

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Heightened competition and portfolio companies’ difficulty in servicing debt are other major industry headwinds. Yet, a few players like Golub Capital BDC, Inc. GBDC, Barings BDC, Inc. BBDC and Crescent Capital BDC, Inc. 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Heightened competition and portfolio companies’ difficulty in servicing debt are other major industry headwinds. Yet, a few players like Golub Capital BDC, Inc. GBDC, Barings BDC, Inc. BBDC and Crescent Capital BDC, Inc. CCAP are worth keeping an eye on\nAbout the Industry\nThe 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 can be converted into equity in the target firm.\n3 Key Themes to Watch in the SBIC & Commercial Finance Industry\nAsset Quality: Following the COVID-19 outbreak and a subsequent halt in business activities in 2020, most sectors wherein SBIC & Commercial Finance companies provide finance were hit hard. This raised fears of a deterioration of asset quality for industry players. Nonetheless, support from the administration in the form of stimulus packages and the subsequent re-opening of businesses supported economic growth. This, thus, prevented a substantial rise in delinquency rates for the industry players. However, with the interest rates at a 23-year high of 5.25-5.50% now, industry players are likely to witness some weakness in asset quality as the portfolio companies might find difficulty in servicing debt. Further, economic downturn and heightened geopolitical risk will exert pressure on SBIC & Commercial Finance companies’ asset quality.High Rates: The Federal Reserve aggressively raised interest rates since March 2022 to control high inflation. With the inflation cooling down and the job market slowing, the central bank will start cutting interest rates from September. Despite this, the rates are going to remain high before they come down significantly by the end of 2025.As the higher rates lead to a spike in prepayments and refinancing, SBIC & Commercial Finance industry players will keep benefiting. However, the demand for products and services offered by these companies is likely to moderate due to a challenging macroeconomic backdrop and increased competition. Thus, the industry players’ revenue growth is expected to be hampered in the upcoming period.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 reduce portfolio risks by investing in higher capital structures without forgoing current returns. Thus, the act provided extra funding flexibility to these companies and will continue offering more growth opportunities.\nZacks Industry Rank Indicates Bleak Prospects\nThe Zacks SBIC & Commercial Finance industry is a 34-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #186, which places it in the bottom 26% 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 underperformance 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 bottom 50% of the Zacks-ranked industries is a result of a discouraging earnings outlook for the constituent companies in aggregate. Looking at aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s bottom-line growth potential. Since 2023-end, the industry’s earnings estimates for the current year have been revised marginally lower.Before we present a few stocks that are well-positioned to outperform the market despite near-term weakness, let’s check out the industry’s recent stock market performance and valuation picture.\nIndustry Underperforms the Sector and the S&P 500\nThe Zacks SBIC & Commercial Finance industry has underperformed both the S&P 500 composite and its sector over the past year.The stocks in this industry have collectively risen 6.4% over this period, while the Zacks S&P 500 composite and the Zacks Finance sector have rallied 24.9% and 26.9%, respectively.\nOne-Year Price Performance \nIndustry's Valuation\nOne might get a good sense of the industry’s relative valuation by looking at its price-to-tangible book ratio (P/TB), which is commonly used for valuing loan providers because of large variations in their earnings from one quarter to the next.The industry currently has a trailing 12-month P/TB of 0.92X. The highest level of 1.05X, the lowest of 0.42X and a median of 0.92X 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 evidenced by the trailing 12-month P/TB for the S&P 500 composite of 14.63X, as the chart below shows.\nPrice-to-Tangible Book Ratio (TTM)\nAs 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. Hence, comparing 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 5.61X is also way above the Zacks SBIC & Commercial Finance industry’s ratio, as shown below.\nPrice-to-Tangible Book Ratio (TTM) \n3 SBIC & Commercial Finance Stocks to Watch\nGolub Capital BDC: This Zacks Rank #3 (Hold) firm makes investments mainly in one stop (a loan that combines the characteristics of traditional first-lien senior secured loans and second-lien or subordinated loans) and other senior secured loans of middle-market companies. Based in New York, the company invests roughly $10-$75 million of capital. Following the acquisition of Golub Capital Investment Corporation in 2019, Golub Capital became the fifth largest externally managed, publicly traded business development company in the United States in terms of assets. The deal continues to support the company’s financials.As of June 30, 2024, Golub Capital had total investments (fair value) of $7.86 billion in 380 portfolio companies and NAV per share of $15.32. As of the same date, the company had cash, cash equivalents and foreign currencies of $147.5 million and restricted cash and cash equivalents of $317.2 million.Further, at June 2024-end, GBDC had $4.34 billion in outstanding debt. Further, the company had $1.38 billion of remaining availability in the aggregate on its revolving credit facility with JPMorgan and Deutsche Bank and commitments and availability on its unsecured line of credit with GC Advisors.The company’s shares have rallied 1.2% over the past year. The Zacks Consensus Estimate for fiscal 2024 earnings has remained unchanged over the past month. GBDC has a market cap of $3.97 billion.\nPrice and Consensus: GBDC\nBarings BDC: The company invests in syndicated senior secured loans, bonds and other fixed-income securities in performing, well-established middle-market businesses operating across a wide range of industries located primarily in the United States. This Zacks Rank #2 (Buy) company also has investments in middle-market companies located outside the country.  You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. As of June 30, 2024, Barings BDC had total investments (fair value) of 2.4 billion and NAV per share of $11.36. Further, at June 2024-end, BBDC had $1.4 billion of total debt outstanding. This is significantly higher than cash and foreign currencies of $84.4 million as of the same date.Over the years, this Charlotte, NC-based company has grown through acquisitions. Some of the notable ones include MVC Capital, Inc. and Sierra Income Corporation. These have helped bolster its market share over time.The company’s shares have rallied 7.6% over the past year. The Zacks Consensus Estimate for current-year earnings has moved 9.4% upward over the past 30 days. BBDC has a market cap of $1.07 billion.\n Price and Consensus: BBDC\nCrescent Capital: This is a specialty finance company mainly focused on originating and investing in the debt of private middle market companies principally located in the United States. Carrying a Zacks Rank #3, CCAP offers capital solutions to companies with sound business fundamentals and strong growth prospects.As of June 30, 2024, Crescent Capital had total investments (fair value) of $1.61 billion (in 183 portfolio companies). Of the total investment value, 62.4% was Unitranche first lien. As of the same date, NAV was $20.30 per share.Los Angeles, CA-based company had a debt of $879.9 million. It had $36.1 million in cash and cash equivalents, and restricted cash and $293.8 million of undrawn capacity on its credit facilities.Crescent Capital has a market cap of $681.6 million. Over a year, the company’s shares have risen 10.6%. The Zacks Consensus Estimate for 2024 earnings has remained unchanged over the past 30 days.\nPrice and Consensus: CCAP \nWant the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report\nGolub Capital BDC, Inc. (GBDC) : Free Stock Analysis Report\nBARINGS BDC, INC. (BBDC) : Free Stock Analysis Report\nCrescent Capital BDC, Inc. (CCAP) : Free Stock Analysis Report\nTo read this article on Zacks.com click here.\nZacks Investment Research","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"hasMoreComments":false,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false}}