Why I Would Avoid Gladstone Capital: Q1 2012 Earnings Breakdown

| About: Gladstone Capital (GLAD)

Gladstone Capital (NASDAQ:GLAD) is a business development company, which recently announced 1st-quarter earnings. The negative trends highlighted in Q4 2011 continue in Q1 2012, as discussed here. Given the continued underperformance of GLAD, I believe that this stock should be avoided by investors.


GLAD reported net income of $0.25 per share, which covers the monthly dividend of $0.07. The current stock price of $7.85 results in an annualized yield of 10.7%. Quarter over quarter, net investment income increased from $0.21 to $0.25.

Net Asset Value (NAV)

GLAD reported a NAV at quarter end of $9.62. Over the past 6 quarters (from earliest to latest) the NAV change is as follows: 11.85, 11.18, 10.34, 10.16, 9.90, 9.62. GLAD management has lost $2.23 of NAV while only paying out $1.26 in dividends. During the past quarter, GLAD paid out $0.21 in dividends with a drop in book value of $0.30. The trend of paying dividends while eroding book value continued in Q1 2012.

Portfolio Performance

GLAD's entire portfolio was valued at 77 cents on the dollar. This represents a 200 basis point, or 2 cent decrease, from Q4 2011. The drop in portfolio value was driven by unrealized depreciation in one of its holding companies, Sunshine Media Holdings.

Per the latest 10Q, the following table lists all investments on non-accrual (i.e. not generating income) status.



Access Television

cable airtime (infomercials)


web-based evaluator of imaging products

Kansas Cable

cable, internet provider

Lindmark Acquisitions



Yellow pages publishing

US Healthcare Communications

Magazine publishing

Sunshine Media Holdings



Manufacturing-polyethylene film

While not explicitly noted in the earnings press release, GLAD placed debt of both Viapack and Sunshine on non-accrual status. Regarding Sunshine, the earnings release had this to say:

a notable depreciation on Sunshine Media Holdings ("Sunshine") in the quarter ended March 31, 2011, due to diminished portfolio company financial and operational performance and a restructure during this time period.

A search of the earnings release reveals that the non-accrual status of Viapack was not even mentioned. This is a material change in the portfolio that should be noted. This makes two new companies to be placed on non-accrual status this past quarter.

It should be noted that both Sunshine and Viapack were flagged as troubled companies, but not yet on non-accrual status, in my previous article. They had valuations of 0.20 and 0.17 cents on the dollar, respectively, at quarter-end Q4 2011. Three months ago I wrote that:

My guess is that these investments will not be generating income for long.

What is even more important is the health of the portfolio companies that are currently providing the income to GLAD for distribution to shareholders. In the table below, I list all portfolio companies that are currently generating income, but are valued at 75 cents on the dollar or below. The valuations for the previous two quarters are provided, and the units of the valuation metric is cents on the dollar.



Value - Q4 2011

Value - Q1 2012

BAS Broadcasting

Radio station operator



Chinese Yellow Pages Company

Publisher of Chinese language directories



GFRC Holdings

Manufacturing glass fiber reinforced concrete



Heartland Communications Group

Radio station operator



International Junior Golf Training

Golf training



Legend Communications of Wyoming

Operator of radio stations



Sunburst Media

Radio station operator



No new companies have been placed on this list. However, the valuations of all of the companies except for Legend Communications (an increase from 0.50 to 0.52) have dropped. It appears that these troubled companies are poised to cause GLAD future problems based on their continued drop in valuation. If these companies eventually get placed on non-accrual status, it is likely that future net investment income will suffer.

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

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Tagged: , Asset Management, Earnings
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