Intrinsic Value Saratoga Investment Corp. (SAR)

• Previous Close: $23.64
• Intrinsic Value: $14.65
• Upside potential: -38%

Stock Valuation Context

Business Model And Market Position

Saratoga Investment Corp. is a business development company (BDC) specializing in leveraged buyouts, refinancings, and growth capital for middle-market businesses. The firm primarily invests in senior secured loans, mezzanine debt, and equity co-investments, targeting companies with EBITDA between $5 million and $50 million. Operating in a competitive BDC landscape, Saratoga differentiates itself through a disciplined credit approach, focusing on lower-middle-market companies with strong cash flows and defensible market positions. Its portfolio spans diverse industries, including healthcare, business services, and consumer products, providing diversification while maintaining a rigorous underwriting process. The company’s market position is bolstered by its ability to structure flexible financing solutions, often filling gaps left by traditional lenders. This niche focus allows Saratoga to generate attractive risk-adjusted returns while maintaining a relatively conservative leverage profile compared to peers.

Revenue Profitability And Efficiency

Saratoga reported revenue of $148.9 million for the fiscal year ending February 2025, with diluted EPS of $2.02. The absence of net income suggests significant non-operating expenses or one-time charges, though operating cash flow was robust at $96.5 billion, indicating strong cash generation from core activities. Capital expenditures were negligible, reflecting the asset-light nature of its BDC model.

Earnings Power And Capital Efficiency

The company’s earnings power is driven by its interest and dividend income from its debt and equity investments. With $148.2 billion in cash and equivalents, Saratoga maintains ample liquidity to support new investments and manage portfolio turnover. However, total debt of $730.6 billion indicates a leveraged balance sheet, typical for BDCs, which rely on borrowings to fund investments.

Balance Sheet And Financial Health

Saratoga’s financial health is characterized by significant liquidity, with $148.2 billion in cash and equivalents, but also high total debt of $730.6 billion. The leverage ratio suggests reliance on debt financing, common in the BDC sector, though the substantial cash position provides a buffer against market volatility. Shareholders’ equity is supported by a disciplined investment approach.

Growth Trends And Dividend Policy

The company has demonstrated a commitment to shareholder returns, with a dividend per share of $3.00. Growth trends are likely tied to the performance of its middle-market portfolio, which benefits from economic conditions favoring private credit. The dividend yield, combined with potential capital appreciation, makes Saratoga an attractive option for income-focused investors.

Valuation And Market Expectations

Market expectations for Saratoga hinge on its ability to maintain yield spreads and manage credit risk in its portfolio. The current valuation reflects investor confidence in its underwriting discipline and the stability of its cash flows. Comparables in the BDC sector suggest Saratoga trades in line with peers, with a focus on dividend sustainability.

Strategic Advantages And Outlook

Saratoga’s strategic advantages include its niche focus on lower-middle-market companies and a conservative credit approach. The outlook remains positive, supported by strong demand for private credit and the firm’s ability to capitalize on dislocations in traditional lending markets. However, macroeconomic risks, such as rising interest rates, could impact portfolio performance.

Sources

10-K filings, investor presentations