New Mountain Finance Corporation (NYSE: NMFC) and KCAP Financial (NASDAQ:KCAP) are both small-cap finance companies, but which is the superior business? We will contrast the two businesses based on the strength of their earnings, profitability, institutional ownership, valuation, dividends, analyst recommendations and risk.

Profitability

This table compares New Mountain Finance Corporation and KCAP Financial’s net margins, return on equity and return on assets.

Net Margins Return on Equity Return on Assets
New Mountain Finance Corporation 65.22% 10.15% 5.38%
KCAP Financial 17.53% 7.44% 3.84%

Analyst Recommendations

This is a breakdown of recent ratings for New Mountain Finance Corporation and KCAP Financial, as reported by MarketBeat.com.

Sell Ratings Hold Ratings Buy Ratings Strong Buy Ratings Rating Score
New Mountain Finance Corporation 0 1 0 0 2.00
KCAP Financial 0 2 1 0 2.33

New Mountain Finance Corporation currently has a consensus target price of $15.00, indicating a potential upside of 5.26%. KCAP Financial has a consensus target price of $9.75, indicating a potential upside of 158.62%. Given KCAP Financial’s stronger consensus rating and higher probable upside, analysts plainly believe KCAP Financial is more favorable than New Mountain Finance Corporation.

Valuation & Earnings

This table compares New Mountain Finance Corporation and KCAP Financial’s gross revenue, earnings per share (EPS) and valuation.

Gross Revenue Price/Sales Ratio EBITDA Earnings Per Share Price/Earnings Ratio
New Mountain Finance Corporation N/A N/A N/A $1.57 9.08
KCAP Financial $32.54 million 4.29 $5.55 million $0.15 25.13

KCAP Financial has higher revenue and earnings than New Mountain Finance Corporation. New Mountain Finance Corporation is trading at a lower price-to-earnings ratio than KCAP Financial, indicating that it is currently the more affordable of the two stocks.

Dividends

New Mountain Finance Corporation pays an annual dividend of $1.36 per share and has a dividend yield of 9.5%. KCAP Financial pays an annual dividend of $0.48 per share and has a dividend yield of 12.7%. New Mountain Finance Corporation pays out 86.6% of its earnings in the form of a dividend, suggesting it may not have sufficient earnings to cover its dividend payment in the future. KCAP Financial pays out 320.0% of its earnings in the form of a dividend, suggesting it may not have sufficient earnings to cover its dividend payment in the future.

Volatility and Risk

New Mountain Finance Corporation has a beta of 0.59, suggesting that its stock price is 41% less volatile than the S&P 500. Comparatively, KCAP Financial has a beta of 1.69, suggesting that its stock price is 69% more volatile than the S&P 500.

Institutional and Insider Ownership

40.7% of New Mountain Finance Corporation shares are owned by institutional investors. Comparatively, 20.2% of KCAP Financial shares are owned by institutional investors. 9.7% of New Mountain Finance Corporation shares are owned by company insiders. Comparatively, 8.0% of KCAP Financial shares are owned by company insiders. Strong institutional ownership is an indication that large money managers, hedge funds and endowments believe a company is poised for long-term growth.

Summary

New Mountain Finance Corporation beats KCAP Financial on 8 of the 14 factors compared between the two stocks.

New Mountain Finance Corporation Company Profile

New Mountain Finance Corporation is a closed-end, non-diversified management investment company. The Company’s investment objective is to generate current income and capital appreciation through the sourcing and origination of debt securities at all levels of the capital structure, including first and second lien debt, notes, bonds and mezzanine securities. Its investments may also include equity interests, such as preferred stock, common stock, warrants or options received in connection with its debt investments or may include a direct investment in the equity of private companies. The Company makes investments through both primary originations and open-market secondary purchases. Its investment portfolio includes its investments in various industries, such as business services, software, consumer services, investment fund, education, energy, healthcare services, distribution and logistics, and Federal services. Its investment advisor is New Mountain Finance Advisers BDC, L.L.C.

KCAP Financial Company Profile

KCAP Financial, Inc. is an internally managed, non-diversified closed-end investment company. The Company has approximately three principal areas of investments. First, the Company originates, structures and invests in senior secured term loans and mezzanine debt primarily in privately-held middle market companies (the debt securities portfolio). In addition, the Company may invest in the equity securities of privately held middle market companies. Second, the Company invests in asset management companies (the Asset Manager Affiliates) that manage collateralized loan obligation funds (CLO Funds). Third, the Company invests in debt and subordinated securities issued by CLOs (CLO fund securities). These CLO fund securities are primarily managed by its Asset Manager Affiliates, but from time-to-time the Company makes investments in CLO Fund Securities managed by other asset managers. The CLO funds typically invest in syndicated loans, high-yield bonds and other credit instruments.

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