Ares Capital Corporation (NASDAQ:ARCC) shares are down more than -2.37% this year and recently increased 1.27% or $0.21 to settle at $16.31. FS Investment Corporation (NYSE:FSIC), on the other hand, is down -21.84% year to date as of 12/05/2017. It currently trades at $8.05 and has returned 0.00% during the past week.
Ares Capital Corporation (NASDAQ:ARCC) and FS Investment Corporation (NYSE:FSIC) are the two most active stocks in the Diversified Investments industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect ARCC to grow earnings at a 3.00% annual rate over the next 5 years. Comparatively, FSIC is expected to grow at a 3.00% annual rate. All else equal, All else equal, the two stocks’ identical expected growth rates would imply a similar potential for capital appreciation..
Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use Return on Investment (ROI) as measures of profitability and return. ARCC’s ROI is 5.50% while FSIC has a ROI of 5.20%. The interpretation is that ARCC’s business generates a higher return on investment than FSIC’s.
Cash is king when it comes to investing. ARCC’s free cash flow (“FCF”) per share for the trailing twelve months was -0.08. Comparatively, FSIC’s free cash flow per share was -0.07.
ARCC’s debt-to-equity ratio is 0.66 versus a D/E of 0.74 for FSIC. FSIC is therefore the more solvent of the two companies, and has lower financial risk.
ARCC trades at a forward P/E of 10.25, a P/B of 0.98, and a P/S of 6.18, compared to a forward P/E of 10.11, a P/B of 0.85, and a P/S of 4.71 for FSIC. ARCC is the expensive of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. ARCC is currently priced at a -9.54% to its one-year price target of 18.03. Comparatively, FSIC is -13.44% relative to its price target of 9.30. This suggests that FSIC is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 1.90 for ARCC and 3.00 for FSIC, which implies that analysts are more bullish on the outlook for FSIC.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. ARCC has a beta of 0.69 and FSIC’s beta is 0.97. ARCC’s shares are therefore the less volatile of the two stocks.
FS Investment Corporation (NYSE:FSIC) beats Ares Capital Corporation (NASDAQ:ARCC) on a total of 6 of the 13 factors compared between the two stocks. FSIC generates a higher return on investment. In terms of valuation, FSIC is the cheaper of the two stocks on an earnings, book value and sales basis, FSIC is more undervalued relative to its price target. Finally, FSIC has better sentiment signals based on short interest.