On Wednesday, Sound Point Meridian Capital (NYSE: SPMC) stock received a new Buy rating from a B.Riley analyst, accompanied by a price target of $22.50. The analyst highlighted the company's position within a novel segment of closed-end funds focusing on cash flow arbitrage from CLO equity, which is known for generating mid-teens un-levered returns.
Sound Point Meridian Capital is underpinned by a $300 million seed portfolio, which was un-levered during its June IPO, a strategy that is anticipated to facilitate efficient scaling and growth in earnings as the company incorporates debt into its capital structure.
The company's acquisition of most of its current portfolio occurred during the wider spread environment between 2022 and 2023. This timing positions Sound Point Meridian Capital to potentially benefit from the ongoing increase in reset and refinance activities within CLOs. Resets are typically advantageous as they can prolong maturities and reduce borrowing costs within CLOs, which can lead to an uptick in returns for equityholders.
Sound Point Meridian Capital's external management by Sound Point, a global top-five CLO manager, provides the fund with a strategic edge in the market, according to the analyst. This advantage extends to both research and trading capacities. The analyst's remarks underscore the potential for Sound Point Meridian Capital to efficiently grow its earnings and scale operations, leveraging the expertise of its management firm in the competitive landscape.
In other recent news, Sound Point Meridian Capital has undergone significant changes in its board and executive leadership. Steven Lipiner has resigned as Director and Chair of the Audit Committee, with Matthew Forstenhausler stepping into the role. Forstenhausler's term is set to expire at the 2027 annual meeting of stockholders. In addition, Ivana Kovačić has stepped down as Chief Compliance Officer, making way for Lucas D. Foss.
Analyst firm Oppenheimer has given Sound Point Meridian Capital an Outperform rating, indicating a positive outlook for the company. Projections from Oppenheimer suggest earnings per share of $1.11 for 2024, $2.52 for 2025, and $2.54 for 2026. These figures correspond to return on equities of 11.2%, 12.8%, and 13.1% for each year, respectively.
The estimated fair value of Sound Point Meridian Capital's shares is $20.65, leading Oppenheimer to set a price target of $21.00. This valuation is based on the company's strategy of paying out what it earns until a formal dividend policy is established. These recent developments mark a significant shift in the company's structure and future prospects.
InvestingPro Insights
Adding to the analyst's bullish outlook on Sound Point Meridian Capital (NYSE: SPMC), recent data from InvestingPro reveals some interesting insights. The company boasts a substantial dividend yield of 13.38%, with the most recent ex-dividend date on September 16, 2024. This aligns with one of the InvestingPro Tips, which notes that SPMC "pays a significant dividend to shareholders." This high yield could be particularly attractive to income-focused investors in the current market environment.
However, it's important to note that InvestingPro also flags potential concerns. The company "suffers from weak gross profit margins" and its "valuation implies a poor free cash flow yield." These factors may warrant closer examination, especially in light of the company's plans to incorporate debt into its capital structure as mentioned in the article.
For investors seeking a more comprehensive analysis, InvestingPro offers 11 additional tips for SPMC, providing a deeper dive into the company's financial health and market position.
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