Intrinsic Value Saratoga Investment Corp 8.50% (SAZ)

• Previous Close: $25.46
• Intrinsic Value: $15.74
• 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, growth financings, and acquisitions of middle-market companies. The firm primarily invests in senior secured loans, mezzanine debt, and equity co-investments, targeting businesses with EBITDA between $5 million and $50 million. Its core revenue model relies on interest income from debt investments and capital gains from equity positions, supplemented by fee income from portfolio management. Operating in the competitive BDC sector, Saratoga differentiates itself through a disciplined credit approach and a focus on lower-middle-market companies with strong cash flows. The firm maintains a diversified portfolio across industries, reducing sector-specific risks while capitalizing on niche opportunities. Its 8.50% notes reflect a yield-focused strategy appealing to income-oriented investors in a low-interest-rate environment.

Revenue Profitability And Efficiency

Saratoga reported $148.9 billion in revenue for FY2025, though net income was negligible, suggesting high interest expenses or one-time charges offset top-line performance. Diluted EPS of $2.02 indicates modest earnings generation per share. Operating cash flow of $96.5 billion demonstrates strong cash conversion from investment activities, with zero capital expenditures reflecting the asset-light nature of its BDC operations.

Earnings Power And Capital Efficiency

The company's earnings power appears constrained by its debt burden, as evidenced by the absence of net income despite substantial revenue. The $2.125 dividend per share suggests a commitment to shareholder returns, though sustainability depends on maintaining portfolio yield quality. Capital efficiency metrics are unavailable without ROIC or ROE figures, but the BDC structure inherently leverages external capital for investment deployment.

Balance Sheet And Financial Health

Saratoga's balance sheet shows $148.2 billion in cash against $730.6 billion in total debt, indicating a highly leveraged position. The 4.9x debt-to-cash ratio raises liquidity concerns, though typical for BDCs employing leverage to enhance returns. With 13.9 million shares outstanding, the capital structure appears equity-light relative to debt obligations.

Growth Trends And Dividend Policy

The 8.50% coupon rate and $2.125 dividend signal a high-yield orientation, targeting income investors. Growth prospects depend on the firm's ability to source quality debt investments amid competitive middle-market lending conditions. Dividend sustainability hinges on maintaining portfolio credit quality and coverage ratios in a rising rate environment.

Valuation And Market Expectations

Market valuation likely reflects the high-yield nature of SAZ's debt securities, pricing in credit risk premiums. The absence of net income despite large revenue suggests investors prioritize yield over earnings growth. Trading multiples are unavailable without market capitalization data, but the 8.50% coupon indicates demanding fixed-income return expectations.

Strategic Advantages And Outlook

Saratoga's niche focus on lower-middle-market debt provides access to less competitive lending opportunities with higher spreads. However, macroeconomic sensitivity and rising default risks pose challenges. The outlook depends on credit underwriting discipline and the firm's ability to navigate interest rate volatility while preserving dividend coverage.

Sources

Company filings (CIK: 0001377936), reported financials for FY ending 2025-02-28