On Monday, Compass Point analysts revised their price target for shares of Saratoga Investment Corp (NYSE:SAR), a business development company, reducing it to $25.25 from the previous $26.25. Despite this adjustment, the firm maintains a Buy rating on the stock. According to InvestingPro data, SAR offers an impressive 12.24% dividend yield and has maintained dividend payments for 18 consecutive years, demonstrating strong shareholder returns.
The price target revision comes with an analysis of Saratoga Investment's current net asset value (NAV), which stands at $26.95. The analysts at Compass Point base their valuation on a price-to-NAV (P/NAV) multiple of 0.95 times, which they believe is justified given the company's credit profile and potential for earnings relative to its dividend.
They note that Saratoga Investment could command a premium multiple akin to a 'growth' BDC, provided it continues to minimize credit issues. InvestingPro data reveals a strong financial position with a current ratio of 2.89 and an overall financial health score rated as "GREAT."
The rationale behind the new price target also considers the expected NAV over the next four quarters, estimated at $26.46. Applying the target P/NAV multiple to this forward NAV estimate led to the new price target of $25.25. This adjustment reflects a balance between the improved credit profile of the company and the impact of lower interest rates and significant repayments on its earnings power.
The analysts see a 12-month potential return of approximately 16% at the new price target for Saratoga Investment. They reiterate their Buy rating, signaling confidence in the company's performance despite the revised price expectation.
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