Put Saratoga Investment On Your Radar

| About: Saratoga Investment (SAR)


Decreasing Earnings.

Increasing NAV.

Undervalued relative to industry and sector.

All information pulled from their most recent two earnings calls

Fiscal year 2017 1st Quarter and 2nd Quarter


Saratoga Investment Corporation (NYSE:SAR) is a specialty finance organization. They are a closed end, non-diversified management investment company. A large part of their portfolio is leveraged loans and mezzanine debt. They can also invest in other assets such as bankruptcy stocks, private equity, international debt, distressed debt, etc. Their investments are managed by Saratoga Investment Advisors, LLC.

Saratoga released their earnings on October 12th and had their earnings call on October 13th. Closing October 20th 1.00% higher than October 12th opening.



Saratoga's total revenue increased, going from $7.76 million in investment income in Q2 of last year to $8.45 million in investment income this year. However, their net income has decreased from $3.66 million to $2.6 million during the same time period. Including net realized gain on investments and net unrealized depreciation on assets, Saratoga's net increase in assets was $5.27 million over the quarter as compared to only $1.24 million during the same quarter last year.

Looking at Saratoga's statement of operations for six months ended August 31st, we can see that Saratoga has fallen in earnings from $8.62 million in 2015, to $8.55 million in 2016. However, EPS shows this change a little better. Weighted average basic and diluted shares have increased from 5.5 million to 5.74 million during the same time frame, causing a fall in earnings per share $1.57 to $1.49.

This change is still apparent when looking at their adjusted net investment income per share, which decreased from $1.05 to $0.99 per share during the same time period.

The reasons for decrease in earnings on a year over year basis is caused by three major line items on the expense side of the income statement: Interest and debt financing expense, base management fees, and incentive management fees. These expenses increased 11.5%, 6.8%, and 10.25% respectively.


Saratoga has increased their total assets from $295.87 million to $299.85 million from May to August, respectively. This represents an annualized increase of 5.5%. This increase was entirely driven by the increase in fair valuation of their current investments, increasing from $264.43 million to $272.8 million during the same time frame.

Over the past 6 months, Saratoga has increased their asset coverage ratio from 302.5% to 308.1%. With these balance sheet changes, Saratoga's net asset value per share increased from $22.11 to $22.39. Representing an annualized increase of 5.16%.

From 2013 to end of fiscal year 2016, Saratoga has increased their debt to assets ratio from 34.5% to 56%. It has leveled off since, however this should be something on investors radars as their interest expense is on the rise and is now cutting into earnings.



Their price to earnings is currently sitting at 8.98. This is below the financial sector average of 16.04. It also sits lower than their industry average (diversified investments) of 19.20. Price to earnings points to Saratoga being undervalued.


Saratoga's dividend yield is extremely high, currently at 9.66%. This is much lower than Saratoga's average 22% dividend from 2009-2013, but still very high. Compared to the sector and industry average dividend yield, 3.24% and 3.21% respectively, Saratoga is undervalued


Saratoga's current stock price is $18.22. A nearly 23% discount on their net asset value of $22.39/share. Net asset value shows Saratoga is undervalued.


As management fees and financing expenses get higher, Saratoga will have to lower managements pay or possibly refinance their debt structure.

Another risk associated with this company is shareholder dilution. Over the past 6 months, management has diluted shareholders on an annualized rate of 5.7%.


Saratoga has a lot of ups and downs. They are undervalued by almost every aspect. On the other hand, they're income statement is looking a little shaky. They have increased revenue, but their earnings are on the decrease because of increased management expenses and interest/financing expenses.


I rate Saratoga as a B (check my Instablog for grade sheet). They are not by any means a weak company, however there are some signals that investors should start to watch for. Mainly, continued increasing expenses, further dilution of shareholders, and their NAV.


There are currently no options available for the stock. With the stock price sitting in the higher teens, it should be relatively easy for smaller investors to dip their hand in this stock. Their stock did not react very much to their recent earnings call, because of this I believe this is a good time to buy the company.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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