Prospect Capital’s (PSEC) Sell Rating Reiterated at National Securities

Prospect Capital (NASDAQ:PSEC)‘s stock had its “sell” rating reissued by analysts at National Securities in a research note issued to investors on Monday. They presently have a $4.00 price objective on the financial services provider’s stock. National Securities’ price objective suggests a potential downside of 37.69% from the company’s current price.

The analysts wrote, “ Prospect earned NII/share of $0.22 for F2Q19, a penny shy of our estimate as expenses were 8.4% above our forecast despite revenues being 1.9% higher. We had modeled $18.5mm of control investment dividend income which came in at $13.0mm but “other income” from control investments was $15.7mm versus our $2.8mm estimate as PSEC had a significant return of capital on its equity in NPRC and amended its loan terms for a $12.8mm structuring fee. We think that with cap rates rising future sales will generate less gains for PSEC from NPRC and that the most of the other income is also likely to be non-recurring, which points to pressure on earnings, in our opinion.

 During the quarter, the average bid on a loan price according to the LSTA (Loan Syndication & Trading Association) declined by 5.8% as heavy outflows from loan funds forced managers to sell loans to meet redemptions. Yet Prospect’s CLO equity portfolio depreciated by 4.3% Q/Q, less than the average bid on a loan despite BSL CLO equity typically being leveraged 10x. As we see it, this makes absolutely no sense.

 Non-accruals at cost increased to $488.5mm or 8.0% of the portfolio from $348.2mm or 5.8% of the portfolio Q/Q. Notably, after the other term loans were past due for a year, Interdent’s term loan C and D were finally placed on non-accrual status. The term loan C was marked down to 61% of cost from 71% the quarter prior although the three term loans ahead of it are still carried at cost. We’re not exactly surprised.

 Pacific World’s term loan A was placed on non-accrual status although it’s being carried above cost although we think it is likely that this loan gets written down materially with time. The term loan B, which had already been on non-accrual status, was marked down to 15% of cost from 49% Q/Q. Universal Turbine Parts had its equity purchased by PSEC who then placed three of its employees on the newly formed Board and the term loan B was written down to 18% of cost from 55% Q/Q.

 We are revising our fiscal 2019 NII/share estimate to $0.82 from $0.88 and our fiscal 2020 NII/share estimate to $0.61 from $0.67. “

Several other equities analysts have also recently issued reports on the company. Zacks Investment Research cut Prospect Capital from a “strong-buy” rating to a “hold” rating in a research note on Tuesday, January 15th. ValuEngine raised Prospect Capital from a “sell” rating to a “hold” rating in a report on Thursday, December 27th. Barclays downgraded Prospect Capital from an “equal weight” rating to an “underweight” rating and dropped their target price for the stock from $7.00 to $6.00 in a report on Tuesday, January 22nd. Finally, BidaskClub raised Prospect Capital from a “sell” rating to a “hold” rating in a report on Thursday, January 10th. Two equities research analysts have rated the stock with a sell rating and three have issued a hold rating to the company’s stock. The company presently has a consensus rating of “Hold” and a consensus target price of $6.00.

Shares of PSEC opened at $6.42 on Monday. The company has a quick ratio of 1.05, a current ratio of 1.05 and a debt-to-equity ratio of 0.77. The stock has a market capitalization of $2.35 billion, a P/E ratio of 8.13 and a beta of 0.69. Prospect Capital has a fifty-two week low of $5.70 and a fifty-two week high of $7.60.

Prospect Capital (NASDAQ:PSEC) last issued its quarterly earnings results on Wednesday, February 6th. The financial services provider reported $0.22 earnings per share (EPS) for the quarter, meeting the Zacks’ consensus estimate of $0.22. The firm had revenue of $187.88 million during the quarter, compared to the consensus estimate of $182.09 million. Prospect Capital had a return on equity of 9.37% and a net margin of 25.89%. The company’s revenue for the quarter was up 15.7% on a year-over-year basis. During the same quarter last year, the company posted $0.20 EPS. Sell-side analysts expect that Prospect Capital will post 0.95 earnings per share for the current year.

In other news, CEO John F. Barry acquired 1,000,000 shares of Prospect Capital stock in a transaction on Friday, December 21st. The shares were bought at an average cost of $5.87 per share, for a total transaction of $5,870,000.00. Following the acquisition, the chief executive officer now directly owns 37,288,278 shares of the company’s stock, valued at approximately $218,882,191.86. The purchase was disclosed in a filing with the Securities & Exchange Commission, which is accessible through this hyperlink. Also, insider John F. Barry purchased 304,792 shares of the business’s stock in a transaction dated Monday, December 24th. The stock was bought at an average price of $5.82 per share, for a total transaction of $1,773,889.44. Following the completion of the acquisition, the insider now directly owns 37,593,070 shares in the company, valued at approximately $218,791,667.40. The disclosure for this purchase can be found here. Insiders bought a total of 1,961,206 shares of company stock valued at $11,758,447 over the last ninety days. Corporate insiders own 10.20% of the company’s stock.

A number of institutional investors and hedge funds have recently modified their holdings of PSEC. GAM Holding AG lifted its holdings in shares of Prospect Capital by 4.7% in the 4th quarter. GAM Holding AG now owns 186,140 shares of the financial services provider’s stock valued at $1,208,000 after buying an additional 8,422 shares during the period. Dean Capital Investments Management LLC increased its stake in Prospect Capital by 12.7% during the 4th quarter. Dean Capital Investments Management LLC now owns 87,964 shares of the financial services provider’s stock worth $555,000 after buying an additional 9,888 shares in the last quarter. California Public Employees Retirement System grew its position in shares of Prospect Capital by 3.6% in the fourth quarter. California Public Employees Retirement System now owns 731,900 shares of the financial services provider’s stock valued at $4,618,000 after purchasing an additional 25,300 shares in the last quarter. TCG Advisors LP purchased a new stake in shares of Prospect Capital in the fourth quarter valued at approximately $227,000. Finally, Essex Financial Services Inc. grew its position in shares of Prospect Capital by 19.7% in the fourth quarter. Essex Financial Services Inc. now owns 32,452 shares of the financial services provider’s stock valued at $205,000 after purchasing an additional 5,349 shares in the last quarter. 14.12% of the stock is owned by institutional investors.

Prospect Capital Company Profile

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.

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