Owl Capital: A Yield to Hoot About

12/17/2020 5:00 am EST

Focus: FINANCE

Douglas Gerlach

President, ICLUBcentral, Inc.

Owl Rock Capital (ORCC) is a business development company (BDC) — a type of venture capital fund that raises capital through borrowing and issuing stock, explains Doug Gerlach, editor of SmallCap Informer.

From that capital, the company makes loans to companies that have EBITDA between $10 and $250 million (the average is $95 million). Because its credit rating is solid, Owl Rock can borrow at better rates than the companies to which it lends.

From repaid loan proceeds, Owl Rock makes required shareholder distributions of at least 90% of net investment earnings. Owl Rock’s current portfolio is diversified across 110 companies in 28 industries.

All loans are floating rate, providing protection from Fed actions; 97% of loans are senior-secured and 79% are first lien investments.

Owl Rock’s specialty is funding recession-resistant companies, with more than 7% of their portfolio in healthcare and 9% in information technology. Owl Rock’s size means that they can provide all necessary loans or anchor a funding team to secure large borrowers.

While Owl Rock is primarily an income opportunity, there does exist the potential for capital appreciation, and the stock could reach $34 if EPS grow as expected and a P/E of 15 is maintained.

We are targeting modest 8% growth of EPS and revenues annually over the next five years. Within its industry, Owl Rock’s pre-tax profit margins are superb.

Our low price is set at $11.17, the product of the 52-week low P/E of 8.9 times the estimated FY 2020 EPS of $1.32. The company pays quarterly distributions with a present indicated yield of 9.0%.

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