• If you are wondering whether Main Street Capital at around US$51.74 is attractively priced or asking too much for its prospects, you are asking the right question for this stock.
• The share price is down 0.5% over the past week, 2.2% over the past month, and 16.2% year to date, even though the 3 year and 5 year returns sit at 67.3% and 82.6% respectively.
• Recent attention on Main Street Capital has centered on how its business development model fits into a higher rate backdrop and what that means for portfolio income and asset values. Commentators have also focused on how the current share price lines up against the company’s long term return profile and dividend characteristics, which helps explain some of the recent price moves.
• On Simply Wall St’s valuation checklist, Main Street Capital scores 4 out of 6. The next step is to look at how different valuation methods line up and then consider an even richer way to think about value that will be covered at the end of this article.

Approach 1: Main Street Capital Excess Returns Analysis

The Excess Returns model looks at how effectively Main Street Capital turns shareholder capital into earnings above its own cost of equity, then capitalizes those extra profits into an intrinsic value per share.

For Main Street Capital, the model uses a Book Value of $33.46 per share and a Stable EPS of $5.18 per share, based on the median return on equity from the past 5 years. The Average Return on Equity is 16.94%, while the Cost of Equity is $2.82 per share. The spread between them, described here as an Excess Return of $2.36 per share, is what this approach is really pricing.

The analysis also assumes a Stable Book Value of $30.57 per share, taken from the median book value over the past 5 years. Plugging these inputs into the Excess Returns framework produces an estimated intrinsic value of about $72.26 per share. This is around 28.4% above the recent share price of roughly $51.74, which indicates that the stock appears undervalued according to this method.

Result: UNDERVALUED

Our Excess Returns analysis suggests Main Street Capital is undervalued by 28.4%. Track this in your watchlist or portfolio, or discover 46 more high quality undervalued stocks.

Approach 2: Main Street Capital Price vs Earnings

For a profitable company like Main Street Capital, the P/E ratio is a useful shorthand for how much investors are paying for each dollar of current earnings. It ties the share price directly to what the business is actually earning today.

In general, higher growth expectations or lower perceived risk can support a higher P/E, while slower growth or higher risk usually line up with a lower, more cautious multiple. Your job as an investor is to decide whether the current P/E fairly reflects those expectations and risks.

Main Street Capital currently trades on a P/E of about 11.29x. That sits below the Capital Markets industry average P/E of about 39.52x and also below the peer group average of about 17.08x. Simply Wall St’s proprietary Fair Ratio for Main Street Capital is 11.28x, which is designed to reflect its own earnings profile, industry, profit margins, market cap and company specific risks.

This Fair Ratio is more tailored than a simple peer or industry comparison because it adjusts for the company’s characteristics instead of assuming all capital market stocks deserve the same multiple. With the current P/E of 11.29x almost exactly in line with the Fair Ratio of 11.28x, the stock looks priced about right on this measure.

Result: ABOUT RIGHT

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Upgrade Your Decision Making: Choose your Main Street Capital Narrative

Earlier it was mentioned that there is an even better way to understand valuation. Narratives on Simply Wall St let you attach a clear story to your numbers by combining your view on Main Street Capital’s business, your revenue, earnings and margin estimates, and your fair value into a single framework. This sits on the Community page, updates automatically when news or earnings arrive, and helps you decide whether the stock looks attractive or stretched by comparing your Fair Value to the current price. One investor might build a cautious Narrative around the lower analyst target of US$50.00 that focuses on risks from shifting toward new lower middle market platforms and higher nonaccruals. Another might build a more optimistic Narrative around the US$70.00 target that leans on record net asset value per share, ongoing supplemental dividends and a diversified portfolio. Both perspectives are visible side by side so you can see how different stories lead to different valuation views.

Do you think there's more to the story for Main Street Capital? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.