GLADSTONE INVESTMENT CORP/DE GAIN
February 17, 2010 - 11:53am EST by
ele2996
2010 2011
Price: 4.90 EPS (0.53) (1.64)
Shares Out. (in M): 22 P/E NMF NMF
Market Cap (in $M): 108 P/FCF 10.2x 10.2x
Net Debt (in $M): 14 EBIT 11 11
TEV ($): 122 TEV/EBIT 11.5x 11.5x

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Description

Gladstone Investment Corp is a Business Development Company (BDC) which began operations in June of 2005 following an underwriting at $15.00 a share. The company was written up by round291 on 12/23/2005 and by baird909 on 7/1/2008. Interested readers should refer to those write ups as they provide a good history of the company's problems since its inception. They also provide good background commentary on the company's management. Needless to say, the company has had a very disappointing history as GAIN's share price has declined by 67.4% since their original issuance. However, management is considered to be honest and the company's balance sheet has stabalized at what I consider to be an attractive level vis-a-vis the price of the shares.

On 12/31/2009, the company had stockholders equity of $175 mil or an NAV of $7.93 a share. At $4.90, GAIN's shares are trading at a discount to NAV of 38.2%. Only three other BDC's trade at meaningfully greater discounts to book - Kohlberg Capital (61%), GSC Capital (59%) and American Capital (55%) - and they are all substantially more leveraged than GAIN. Therein lies comfort and, perhaps, opportunity.

On 12/31/2009, GAIN owned a written down book of loans, preferred stock and equity positions with a cost of $225.9 mil and a market value of $187.4 mil. All of these investments are in small companies which have been in a difficult economic enviroment. GAIN's management is well versed in working with these sorts of companies and there is a chance that there will be a recovery of value in the future. A full recovery would improve NAV by $1.74 a share to $9.67 a share. Today's price would be a discount to that very hopeful figure of 50.7%.

Adjusted for overnight borrowings on the books 12/30/2009 (put on for BDC compliance purposes) there is only $15 mil of debt which is covered 12.5 times by investments at market. While BDC's usually make a profit on the spread between their cost of funds and the return on their investments, GAIN had been precluded from using leverage by the withdrawal of their lending line. As a consequence, the risk from leverage has almost been eliminated. While management is looking for ways to leverage the balance sheet, long term funding has not been available. Should it become available, it should enhance stockholder returns, at least in the short term.

At the present time, GAIN earns about $0.48 a share annually in cash from its portfolio. It pays out that amount in a $0.04 monthly dividend for a yield of 9.8%

Overall, for $4.90 today, an investor can purchase a discounted, almost unlevered portfolio of $7.93 which pays a cash dividend yield of 9.8%. The past may not have been pretty, but the odds for success have greatly improved.

 

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