Stock Analysis & Valuation Saratoga Investment Corp. (SAR)

• Previous Close: $23.64
• Sector Valuation Confidence Level: High

Valuation method	Value, $	Upside, %
Artificial intelligence (AI)	284.04	1102
Intrinsic value (DCF)	14.65	-38
Graham-Dodd Method		n/a
Graham Formula	84.77	259

Strategic Investment Analysis

Company Overview

Saratoga Investment Corp. (NYSE: SAR) is a leading business development company (BDC) specializing in customized financing solutions for lower middle-market companies in the U.S. With a focus on leveraged buyouts, growth financings, and recapitalizations, Saratoga provides flexible capital through first and second lien loans, mezzanine debt, and equity investments. The firm targets businesses with EBITDA of at least $2 million and revenues between $8 million and $250 million, typically investing $5 million to $50 million per transaction. Saratoga operates across diverse sectors, including aerospace, healthcare, technology, and industrial services, leveraging its expertise to support underserved mid-market enterprises. Headquartered in New York with an office in New Jersey, Saratoga stands out for its hands-on approach, often taking majority stakes and actively participating in portfolio company growth. As a publicly traded BDC, it offers investors exposure to private credit and middle-market lending while providing a steady dividend yield.

Investment Summary

Saratoga Investment Corp. presents an attractive opportunity for income-focused investors, offering a dividend yield supported by its portfolio of middle-market loans and equity investments. The company's focus on lower middle-market businesses provides access to a less competitive segment with potentially higher yields. However, investors should consider the inherent risks of BDCs, including credit risk from leveraged loans, interest rate sensitivity, and regulatory constraints. Saratoga's diversified portfolio across multiple industries mitigates some sector-specific risks, but its performance remains tied to broader economic conditions affecting small and mid-sized businesses. The firm's historical ability to source deals in its niche and maintain disciplined underwriting could support continued dividend sustainability.

Competitive Analysis

Saratoga Investment Corp. competes in the crowded BDC space by focusing on the lower end of the middle market, where larger BDCs and traditional lenders are less active. Its competitive advantage stems from its ability to provide flexible, customized financing solutions to smaller businesses that may not qualify for traditional bank financing. The firm's hands-on approach, including taking majority stakes in some cases, allows for greater oversight and value creation compared to passive lenders. However, Saratoga faces intense competition from other BDCs, private credit funds, and increasingly from direct lending platforms. Its smaller scale relative to industry leaders limits its ability to participate in larger deals and may result in higher operating costs as a percentage of assets. The company differentiates itself through sector expertise in areas like business services and healthcare, but must continually demonstrate underwriting discipline to maintain portfolio quality in a competitive lending environment.

Major Competitors

• Ares Capital Corporation (ARCC): As the largest BDC by assets, Ares Capital benefits from scale advantages and access to larger deals. Its relationship with Ares Management provides deal flow and resources Saratoga cannot match. However, Ares focuses on larger middle-market companies, creating differentiation in target markets.
• FS KKR Capital Corp. (FSK): FS KKR combines the resources of FS Investments and KKR, offering similar middle-market lending services but at greater scale. Its broader platform allows for larger check sizes and more diversified portfolios, though Saratoga may be more nimble in smaller deals.
• Golub Capital BDC (GBDC): Golub Capital focuses on senior secured loans to middle-market companies, competing directly with Saratoga's core business. Golub's stronger balance sheet and lower-cost funding provide pricing advantages, but Saratoga's willingness to take junior debt and equity positions creates differentiation.
• BlackRock TCP Capital Corp. (TCPC): TCPC's affiliation with BlackRock provides brand recognition and potential deal flow advantages. Both companies target similar middle-market companies, but TCPC's focus on senior secured loans makes it less competitive with Saratoga's mezzanine and equity offerings.
• Prospect Capital Corporation (PSEC): Prospect Capital is another mid-sized BDC with a similar investment strategy to Saratoga, including mezzanine debt and equity investments. Prospect's larger size provides diversification benefits, but Saratoga's more concentrated portfolio may offer greater upside potential from active management.