Stock Analysis & Valuation OFS Capital Corporation (OFS)

• Previous Close: $4.97
• Sector Valuation Confidence Level: High

Valuation method	Value, $	Upside, %
Artificial intelligence (AI)	59.12	1090
Intrinsic value (DCF)	7.23	45
Graham-Dodd Method	3.07	-38
Graham Formula	27.82	460

Strategic Investment Analysis

Company Overview

OFS Capital Corporation (NASDAQ: OFS) is a leading business development company (BDC) specializing in flexible capital solutions for U.S.-based middle-market companies. Focused on debt and structured equity investments, OFS Capital provides financing for recapitalizations, leveraged buyouts, growth capital, and acquisitions across diverse industries, including aerospace, healthcare, consumer products, and industrial manufacturing. The company targets businesses with revenues between $10 million and $200 million, offering investments ranging from $5 million to $35 million. Unlike venture capital firms, OFS avoids start-ups and turnarounds, prioritizing stable cash-flowing enterprises with EBITDA exceeding $5 million. Its investment strategy includes senior secured loans, mezzanine debt, and minority equity stakes, often partnering with sponsors for larger transactions. As a publicly traded BDC, OFS Capital provides retail and institutional investors access to private middle-market credit, benefiting from high-yield debt structures and disciplined underwriting. With a market cap of ~$113 million, OFS operates in the competitive BDC sector, leveraging its niche focus on lower middle-market companies to differentiate itself from larger peers.

Investment Summary

OFS Capital presents a high-risk, high-reward opportunity within the BDC space, appealing to income-focused investors with its 1.36 annual dividend per share (~10% yield based on current pricing). The company’s concentrated portfolio of middle-market debt offers attractive yields, supported by a net income of $28.4 million in its latest fiscal year. However, risks include its small scale (market cap ~$113 million) compared to larger BDCs, exposure to economic downturns (evidenced by a beta of 1.45), and reliance on floating-rate loans in a rising-rate environment. The lack of capex and strong operating cash flow ($33 million) suggest disciplined capital allocation, but its $68.3 million debt load warrants monitoring. Investors should weigh its niche market focus against competitive pressures from larger BDCs with broader platforms.

Competitive Analysis

OFS Capital’s competitive advantage lies in its specialized focus on lower middle-market companies (EBITDA $5M+), a segment often underserved by larger BDCs and private credit funds. Its ability to structure bespoke debt and equity solutions (e.g., unitranche loans, minority stakes) provides flexibility to borrowers, while its partnerships with independent sponsors enhance deal flow. However, OFS faces intense competition from larger BDCs like Ares Capital (ARCC) and FS KKR Capital (FSK), which benefit from economies of scale, diversified portfolios, and lower funding costs. OFS’s smaller size limits its capacity to lead large syndicated deals, forcing reliance on co-investments. Its sector-agnostic approach diversifies risk but may lack the industry expertise of specialized lenders. The BDC sector’s regulatory structure (e.g., RIC requirements) also constrains OFS’s leverage and liquidity management versus private credit alternatives. While OFS’s high-touch underwriting may reduce default risks, its portfolio concentration in cyclical industries (e.g., industrials, consumer) could pressure performance in a downturn. The company’s 1.45 beta suggests higher volatility than peers, reflecting its niche focus and smaller capital base.

Major Competitors

• Ares Capital Corporation (ARCC): The largest BDC by market cap, ARCC dominates middle-market lending with scale advantages, lower borrowing costs, and a diversified portfolio. Its strengths include robust deal origination and investment-grade balance sheet, but its size can limit agility in niche lower-middle-market deals where OFS competes.
• FS KKR Capital Corp. (FSK): FSK leverages KKR’s private equity ecosystem for deal flow and underwriting. It focuses on larger middle-market transactions, often crowding out smaller players like OFS. However, OFS’s focus on smaller EBITDA borrowers ($5M+) allows it to avoid direct competition in some segments.
• Main Street Capital Corporation (MAIN): MAIN shares OFS’s focus on lower middle-market companies but differentiates with a hybrid debt-equity strategy and lower fee structure. Its stronger brand and longer track record attract conservative investors, though OFS’s higher-yield portfolio may appeal to risk-tolerant capital.
• Hercules Capital, Inc. (HTGC): HTGC specializes in venture debt and growth-stage lending, overlapping minimally with OFS’s mature EBITDA-focused clients. However, Hercules’ tech-sector expertise poses a threat if OFS seeks to expand into growth capital.