Analyzing Ares Capital (NASDAQ:ARCC) and MSC Income Fund (NYSE:MSIF)

MSC Income Fund (NYSE:MSIF) and Ares Capital (NASDAQ:ARCC) are both finance companies, but which is the better stock? We will contrast the two businesses based on the strength of their earnings, risk, valuation, institutional ownership, profitability, analyst recommendations and dividends.

Insider and Institutional Ownership

27.4% of Ares Capital shares are owned by institutional investors. 0.5% of MSC Income Fund shares are owned by company insiders. Comparatively, 0.5% of Ares Capital shares are owned by company insiders. Strong institutional ownership is an indication that large money managers, hedge funds and endowments believe a stock will outperform the market over the long term.

Analyst Recommendations

This is a summary of current ratings for MSC Income Fund and Ares Capital, as reported by MarketBeat.com.

	Sell Ratings	Hold Ratings	Buy Ratings	Strong Buy Ratings	Rating Score
MSC Income Fund	0	3	2	1	2.67
Ares Capital	0	3	8	0	2.73

MSC Income Fund currently has a consensus target price of $13.88, suggesting a potential upside of 21.23%. Ares Capital has a consensus target price of $20.39, suggesting a potential upside of 10.81%. Given MSC Income Fund’s higher probable upside, research analysts clearly believe MSC Income Fund is more favorable than Ares Capital.

Earnings and Valuation

This table compares MSC Income Fund and Ares Capital”s revenue, earnings per share (EPS) and valuation.

	Gross Revenue	Price/Sales Ratio	Net Income	Earnings Per Share	Price/Earnings Ratio
MSC Income Fund	$110.26 million	4.89	$100.90 million	$2.14	5.35
Ares Capital	$3.05 billion	4.33	$1.30 billion	$1.35	13.63

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

Profitability

This table compares MSC Income Fund and Ares Capital’s net margins, return on equity and return on assets.

	Net Margins	Return on Equity	Return on Assets
MSC Income Fund	N/A	N/A	N/A
Ares Capital	30.91%	9.80%	4.50%

Summary

Ares Capital beats MSC Income Fund on 9 of the 14 factors compared between the two stocks.

About Ares Capital

Ares Capital Corporation is a business development company specializing in acquisition, recapitalization, mezzanine debt, restructurings, rescue financing, and leveraged buyout transactions of middle market companies. It also makes growth capital and general refinancing. It prefers to make investments in companies engaged in the basic and growth manufacturing, business services, consumer products, health care products and services, and information technology service sectors. The fund will also consider investments in industries such as restaurants, retail, oil and gas, and technology sectors. It focuses on investments in Northeast, Mid-Atlantic, Southeast and Southwest regions from its New York office, the Midwest region, from the Chicago office, and the Western region from the Los Angeles office. The fund typically invests between $20 million and $200 million and a maximum of $400 million in companies with an EBITDA between $10 million and $250 million. It makes debt investments between $10 million and $100 million The fund invests through revolvers, first lien loans, warrants, unitranche structures, second lien loans, mezzanine debt, private high yield, junior capital, subordinated debt, and non-control preferred and common equity. The fund also selectively considers third-party-led senior and subordinated debt financings and opportunistically considers the purchase of stressed and discounted debt positions. The fund prefers to be an agent and/or lead the transactions in which it invests. The fund also seeks board representation in its portfolio companies.