Contrasting Morningstar (NASDAQ:MORN) and Capital Southwest (NASDAQ:CSWC)

Capital Southwest (NASDAQ:CSWC) and Morningstar (NASDAQ:MORN) are both finance companies, but which is the better stock? We will contrast the two businesses based on the strength of their profitability, valuation, earnings, dividends, risk, analyst recommendations and institutional ownership.

Analyst Recommendations

This is a breakdown of recent recommendations and price targets for Capital Southwest and Morningstar, as provided by MarketBeat.

	Sell Ratings	Hold Ratings	Buy Ratings	Strong Buy Ratings	Rating Score
Capital Southwest	0	3	6	0	2.67
Morningstar	0	1	2	0	2.67

Capital Southwest presently has a consensus target price of $23.60, suggesting a potential downside of 3.99%. Morningstar has a consensus target price of $227.33, suggesting a potential upside of 8.56%. Given Morningstar’s higher possible upside, analysts clearly believe Morningstar is more favorable than Capital Southwest.

Valuation & Earnings

This table compares Capital Southwest and Morningstar”s top-line revenue, earnings per share and valuation.

	Gross Revenue	Price/Sales Ratio	Net Income	Earnings Per Share	Price/Earnings Ratio
Capital Southwest	$232.10 million	6.75	$113.00 million	$1.81	13.58
Morningstar	$2.45 billion	3.21	$374.20 million	$10.56	19.83

Morningstar has higher revenue and earnings than Capital Southwest. Capital Southwest is trading at a lower price-to-earnings ratio than Morningstar, indicating that it is currently the more affordable of the two stocks.

Profitability

This table compares Capital Southwest and Morningstar’s net margins, return on equity and return on assets.

	Net Margins	Return on Equity	Return on Assets
Capital Southwest	46.68%	13.88%	6.45%
Morningstar	16.43%	38.57%	12.22%

Volatility and Risk

Capital Southwest has a beta of 0.7, suggesting that its stock price is 30% less volatile than the S&P 500. Comparatively, Morningstar has a beta of 1, suggesting that its stock price has a similar volatility profile to the S&P 500.

Dividends

Capital Southwest pays an annual dividend of $2.32 per share and has a dividend yield of 9.4%. Morningstar pays an annual dividend of $2.00 per share and has a dividend yield of 1.0%. Capital Southwest pays out 128.2% of its earnings in the form of a dividend, suggesting it may not have sufficient earnings to cover its dividend payment in the future. Morningstar pays out 18.9% of its earnings in the form of a dividend. Capital Southwest has raised its dividend for 2 consecutive years and Morningstar has raised its dividend for 16 consecutive years.

Insider & Institutional Ownership

23.4% of Capital Southwest shares are owned by institutional investors. Comparatively, 57.0% of Morningstar shares are owned by institutional investors. 2.7% of Capital Southwest shares are owned by company insiders. Comparatively, 38.8% of Morningstar shares are owned by company insiders. Strong institutional ownership is an indication that endowments, large money managers and hedge funds believe a company is poised for long-term growth.

Summary

Morningstar beats Capital Southwest on 12 of the 16 factors compared between the two stocks.

About Capital Southwest

Capital Southwest Corporation is a business development company specializing in credit and private equity and venture capital investments in middle market companies, mezzanine, later stage, mature, late venture, emerging growth, buyouts, industry consolidation, recapitalizations and growth capital investments. It does not invest in startups, publicly traded companies, real estate developments, project finance opportunities, oil and gas exploration businesses, troubled companies, turnarounds, and companies in which significant senior management is departing. In lower middle market, the firm typically invests in growth financing, bolt-on acquisitions, new platform acquisitions, refinancing, dividend recapitalizations, sponsor-led buyouts, and management buyouts situations. The investment structures are Unitranche debt, subordinated debt, senior debt, first and second lien debt, and preferred and common equity. The firm makes equity co-investments alongside debt investments, up to 20% of total check and only makes non-control investments. The firm is Industry agnostic, but it prefers to invest in Industrial manufacturing and services, value-added distribution, healthcare products and services, business services, specialty chemicals, food and beverage, tech-enabled services and SaaS models. The firm seeks to invest in energy services and products, industrial technologies, and specialty chemicals and products. Within energy services and products, the firm seeks to invest in each segment of the industry, including upstream, midstream and downstream, excluding exploration and production with a focus on differentiated products and services, equipment and tool rental, consumable products, and drilling and completion chemicals. Within industrial technologies, it seeks to invest in automation and process controls, handling and packaging equipment, industrial filtration and fluid handling, measurement, monitoring and testing, professional tools, and sensors and instrumentation. Within and specialty chemicals and products, the firm seeks to invest in businesses that develop and manufacture highly differentiated chemicals and products including adhesives, coatings and sealants, catalysts and absorbents, cosmeceuticals, fine chemicals, flavors and fragrances, performance lubricants, polymers, plastics and composites, chemical dispensing and filtration equipment, professional and industrial trade consumables and tools, engineered solutions for HVAC, plumbing, and electrical installations, specified high performance materials for fire protection and oilfield applications. It may also invest in exceptional opportunities in building products. The firm seeks to invest in the United States and North America. The firm seeks to make investments ranging from $5 million and $25 million in securities. It leads $5 to $70 million financings, Its Target holds of $5 million and $45 million, and the firm is willing to backstop up to $55mm with an active network of co-investors. It seeks to invest in the firm with minimum EBITDA is $3 million and $25 million. In addition to making direct investments, the firm allocates capital to syndicated first and second lien term loans in the upper middle market. Criteria for Upper Middle Market Syndicated 1st Lien is EBITDA Size more than $30 million, Closing Leverage greater than 4 times, investment hold size between $5 million and $7 million up to $15mm with senior loan fund, investment yield greater than 6.5%. Criteria for Upper Middle Market Syndicated 2nd Lien is EBITDA Size more than $50 million, Closing Leverage greater than 6 times, investment hold size between $5 million and $7 million, investment yield greater than 9%. It prefers to take a majority and minority stake. The firm has the flexibility to hold investments for very long period in its portfolio companies. It may also invest through warrants. The firm prefers to take Board participation in its portfolio companies. Capital Southwest Corporation was founded on April 19, 1961 and is based in Dallas, Texas.

About Morningstar

Morningstar, Inc. provides independent investment insights in the United States, Asia. Australia, Continental Europe, the United Kingdom, and internationally. The company operates in five segments: Morningstar Data and Analytics; PitchBook; Morningstar Wealth; Morningstar Credit; and Morningstar Retirement. The company offers managing investments, including mutual funds, ETFs, separate accounts, collective investment trusts, model portfolios, equities, and fixed income securities; Morningstar Direct is an investment-analysis and reporting platform; Morningstar Advisor Workstation, a suite of tool to provide help and advice. The PitchBook segment provides data and research covering the private capital markets comprising venture capital, private equity, private credit and bank loans, and merger and acquisition activities; and pitchbook platform. It provides model portfolios and wealth platforms; Morningstar Managed Portfolios, an advisor service with model portfolios designed for fee-based independent financial advisors; and Morningstar.com that discovers, evaluates, and monitors stocks, ETFs, and mutual funds; build and monitor portfolios and markets. In addition, the company provides credit ratings, research, data, and credit analytics solutions; Morningstar DBRS which offers securitizations and other structured finance instruments, such as asset-backed securities, residential mortgage-backed securities, commercial mortgage-backed securities, and collateralized loan obligations. Further, it offers managed retirement accounts, fiduciary services, Morningstar Lifetime Allocation funds, and custom models; Morningstar Indexes offers market indexes used for performance benchmarks and as the basis for investment products and other portfolio strategies; and Morningstar Sustainalytics provides environmental, social and governance data, research, analysis, and insights. Morningstar, Inc. was incorporated in 1984 and is headquartered in Chicago, Illinois.