Scott Kennedy’s BDC Earnings Series: Assessing Main Street’s Performance For Q1 2024
Summary
This earnings assessment article reviews MAIN’s NAV and NII performance during Q1 2024 and compares results to my expectations. Earnings remain a key driver to stock performance.
MAIN’s quarterly NAV and NII were basically as expected. MAIN’s quarterly NAV experienced a minor increase while the company’s quarterly NII slightly decreased.
MAIN’s minor quarterly NII decrease likely resides within the company’s dividend income account (which would be as expected).
No change in MAIN’s percentage recommendation ranges or risk/performance rating. MAIN is currently deemed modestly overvalued (SELL) strictly from a valuation perspective.
MAIN remains a very good/outperforming BDC from an operational standpoint. However, a recurring theme with MAIN is this BDC remains “pricey”.
Formatting Change to this Article Series
We have recently changed the format of this earnings-related article series (less wording, more visual images). This process remains ongoing and future changes will likely occur.
Commentary
Quarterly NAV Fluctuation: Basically an Exact Match (Within a 0.5% Variance).
NII: Basically an Exact Match (Within $0.01 Per Share).
An “as expected” quarter on both metrics for Main Street Capital MAIN 0.00%↑ in my opinion. MAIN generated a minor quarterly NAV gain which was basically solely from the company’s “at-the-market” (“ATM”) equity offering program. MAIN’s quarterly NII slightly decreased (which was expected). When MAIN’s stock price continues to trade at a notable premium to CURRENT NAV throughout the quarter, it is a great luxury to issue shares of common stock at a cheaper cost of capital when compared to sector peers (which has been factored into MAIN’s percentage recommendation ranges and risk/performance for many years now).
As of 12/31/2023, MAIN had 12 portfolio companies on non-accrual status. I anticipate continued credit risk/portfolio pressure on a couple additional lower middle market (“LMM”) investments during 2024 which has been highlighted in our weekly mREIT and BDC recommendation article series over the past several quarterly cycles. Credit risk will remain a key metric to track over the foreseeable future. Since MAIN mainly invests in the LMM, credit risk/non-accruals are just “the name of the game”/typical. Simply put, there is a higher risk of non-accruals in some portfolio companies but there is also the eventual possibility of higher rewards through notable LMM equity appreciation in other portfolio companies (via growth over time).
Since both quarterly loan originations and a modest net portfolio increase across MAIN’s 3 combined investment sub-portfolios came in largely as anticipated, the likely anticipated quarterly NII decrease resides within the company’s dividend income account. Again, this was correctly projected on my end and was recently highlighted to subscribers. Unlike most BDCs, a pretty large proportion of MAIN’s NII is derived from recurring quarterly dividend income via the company’s many equity positions in control and affiliate investments (over 100 companies). As such, it will be interesting when MAIN provides the company’s full earnings report next month. I/We perform a “deep dive” within all facets of MAIN’s operations, including underlying dividend income trends/forecasting on all control and affiliate investments. I will let subscribers know, if deemed material, where notable dividend income variances occurred regarding specific portfolio investments.
Change or Maintain
NAV Adjustment: Our projection for current NAV per share was adjusted: Down ($0.10) (To Account for the Actual 3/31/2024 NAV Vs. Prior Projection). Price targets have already been adjusted to reflect the change in NAV. The update is included in the card below and the subscriber spreadsheets.
Percentage Recommendation Range (Relative to CURRENT NAV): No Change.
Risk/Performance Rating: No Change. Remains at 2.5.