Income Investors Might Be 'Glad' to Own Gladstone

Gladstone Capital [NDQ:GLAD] August 19, 2009 - $7.89 /share

Dividend = $0.07 monthly = 10.6% current yield

Gladstone Capital (GLAD) seeks to provide high current income through investment in debt of established businesses that are family owned or held by LBO funds. Their IPO came in August of 2001. They have elected to be treated as a business development company and, for tax purposes, they are a regulated investment company. As such, they pay almost no corporate taxes and are required to pass through virtually all their income to their shareholders on an annual basis.

Like almost all financial companies Gladstone suffered through the credit market turmoil and posted a loss of $1.08 /share in 2008. It is expected that fiscal Q4 (FYs end September 30) will show a $0.23 gain and that FY 2010 will come in at around $0.90 - $.092 /share in profits.

Here are their per share numbers as reported by Value Line:

FY	EPS	Div.	B/V	Avg. P/E	52-wk Range
2002	0.75	0.81	12.97	23.4x	14.50-19.50
2003	1.09	1.10	12.97	16.6x	15.50-23.10
2004	1.02	1.37	13.50	21.2x	18.90-25.80
2005	1.33	1.52	13.41	17.7x	19.80-26.50
2006	2.10	1.64	14.02	10.3x	19.90-25.40
2007	1.13	1.68	14.97	20.1x	17.00-24.80
2008	d1.08	1.68	12.89	NMF	4.70-19.90

If the consensus view for about $0.90 /share in year-ahead earnings then GLAD’s multiple is just under 8.8x. That’s extremely low compared with all historical levels. (See chart above for comparisons.)

Gladstone issued over six million new shares last year to firm up the balance sheet and they reduced the dividend to the current rate of $0.07 per month to bring it in line with distributable earnings. The current yield of 10.6% appears safe barring any further credit market craziness.

Book value was $11.86 /share as of June 30, putting today’s share price at a 33.4% discount to asset value.

Gladstone has applied for a Small Business Administration license that would give them access to funds on more favorable terms in both interest rates as well as maturities.

Overall, Gladstone offers risk tolerant investors good current income and a chance for significant capital gains. A rebound to even 10x FY 2010 projections would bring these shares back to at least $9.00 or 14% above last week’s close.

That’s a pretty conservative target as GLAD shares actually traded as high as $14.50 in each calendar year from 2001 right through 2008. They were over $10 earlier this month.

Anyone willing to limit upside to mitigate risk could consider selling March $10 calls for about $0.50 /share. That would cap best-case total return at about 37% for the six month period until expiration while offering about 6% extra of downside protection.

Disclosure: Author is long GLAD shares.

Comments

[Hillsfar:]

I wonder what kind of family businesses they lend to.

It's one thing if it's In-n-Out Burger (which doesn't need cash).

It's another when it's a struggling family restaurant or third-tier auto parts manufacturer/supplier.

Aug 25 01:46 AM

[claudio.lan...:]

Paul
Can you take a look at USG the sheet rock manufacturer that should do well in any recovery. Shares have been steadily climbing and Warren B owns a good size chunk.

Aug 25 10:50 AM

[Paul Price:]

cladio,

USG would have been bankrupt last eyar if Buffett did not lend them $400 million through BRK. He extracted a 10% interest rate as well as convertiblity at $11.40/share through their 2018 bond maturity.

USG is losing big money now and is expected to keep showing losses in 2010 and perhaps 2011 as well.

USG is way too risky for me. See my seeking Alpha write-up on "Buffett's Failure to Sell" USG a few years back.

Aug 25 12:51 PM

[hdfhdhdfhdf...:]

Honestly Paul,

Your analysis here is at best a joke. You did not do any work on Glad, the managent, the financials, what they own, the fee structure, etc. Ever heard of Alied Capital? You have no business investing or writing articles for SeekingAlpha.

Aug 25 07:23 PM

[User241885/...:]

To the writer above who evoked the name of Allied Capital, it sounds like you are in the David Einhorn camp. This is the case of an obsessed short seller who has attempted over the last decade to sue the company several times for fraud and has been repeatedly rebuked by the federal court for harrassing management, attempting illegal wiretaps and raising spurious claims against the company.

When you accuse Paul Price by saying "You did not do any work on Glad......Ever heard of Alied (sic) Capital?" perhaps you are the one who should try doing the work rather than just slurping up and regurgitating baseless charges from a transparently and self-serving shortseller who has been wrong on this company for most of the decade.

And you could start by spelling the company's name correctly. It's "Allied", just the way one would expect. It's a small matter but since attention to detail does not seem to be in your skill set, then maybe you are the one who has no business investing or writing articles for Seeking Alpha.

I do not own any shares of ALD, but I have followed this short-seller's endless drama for years. It has always been my understanding that with investing, it's one thing to be wrong but an entirely different thing to stay wrong.

Aug 26 12:22 PM

[Blurred:]

I am long GLAD and sister company GAIN. I sold out of the other sister company, a REIT called GOOD, that owns commercial property (for pretty obvious reasons).

The idea behind these ventures is to make tiered investments:

GOOD owns the real estate. GAIN loans to small and medium sized corporations through both debt and equity and GLAD invests in the aforementioned small family owned businesses. Most of the businesses that Gain and Glad loan to are, from my understanding, also tenants of the commercial properties that GOOD owns and manages.

I am concerned about the short term viability of GOOD's business, but since the other associated businesses have a vested interested in theses tenants, the REIT should be motivated to offer assistance in the form of reduced or pushed rents, thus helping the investments of GAIN and GLAD.

I own these stocks for the short term income and am accumulating a little at a time. They also have considerable long term upside for two reasons:

1) They are suffering form the general depression of financial values.
2) They have suffered from considerable short selling. Because they see relatively small trading volumes, they are particularly succeptable to large percentage swings on a day to day basis and this allows the shorts to manipulate the stock price. This does however, offer a good opportunity to pick up the shares at a good value.

Sep 09 10:27 AM