Critical Analysis: OFS Capital (NASDAQ:OFS) vs. Morgan Stanley Direct Lending Fund (NYSE:MSDL)

OFS Capital (NASDAQ:OFS) and Morgan Stanley Direct Lending Fund (NYSE:MSDL) are both small-cap finance companies, but which is the superior investment? We will contrast the two companies based on the strength of their analyst recommendations, institutional ownership, valuation, earnings, risk, profitability and dividends.

Risk and Volatility

OFS Capital has a beta of 0.86, suggesting that its stock price is 14% less volatile than the S&P 500. Comparatively, Morgan Stanley Direct Lending Fund has a beta of 0.58, suggesting that its stock price is 42% less volatile than the S&P 500.

Dividends

OFS Capital pays an annual dividend of $0.68 per share and has a dividend yield of 17.0%. Morgan Stanley Direct Lending Fund pays an annual dividend of $1.80 per share and has a dividend yield of 13.2%. OFS Capital pays out -41.2% of its earnings in the form of a dividend. Morgan Stanley Direct Lending Fund pays out 260.9% of its earnings in the form of a dividend, suggesting it may not have sufficient earnings to cover its dividend payment in the future. OFS Capital has increased its dividend for 3 consecutive years. OFS Capital is clearly the better dividend stock, given its higher yield and longer track record of dividend growth.

Earnings & Valuation

This table compares OFS Capital and Morgan Stanley Direct Lending Fund”s revenue, earnings per share (EPS) and valuation.

	Gross Revenue	Price/Sales Ratio	Net Income	Earnings Per Share	Price/Earnings Ratio
OFS Capital	-$17.07 million	-3.13	-$22.11 million	($1.65)	-2.42
Morgan Stanley Direct Lending Fund	$72.45 million	15.87	$58.03 million	$0.69	19.81

Morgan Stanley Direct Lending Fund has higher revenue and earnings than OFS Capital. OFS Capital is trading at a lower price-to-earnings ratio than Morgan Stanley Direct Lending Fund, indicating that it is currently the more affordable of the two stocks.

Profitability

This table compares OFS Capital and Morgan Stanley Direct Lending Fund’s net margins, return on equity and return on assets.

	Net Margins	Return on Equity	Return on Assets
OFS Capital	N/A	N/A	N/A
Morgan Stanley Direct Lending Fund	N/A	N/A	N/A

Institutional and Insider Ownership

10.8% of OFS Capital shares are held by institutional investors. 0.5% of OFS Capital shares are held by company insiders. Comparatively, 0.3% of Morgan Stanley Direct Lending Fund shares are held by company insiders. Strong institutional ownership is an indication that endowments, hedge funds and large money managers believe a stock will outperform the market over the long term.

Analyst Recommendations

This is a summary of current recommendations for OFS Capital and Morgan Stanley Direct Lending Fund, as reported by MarketBeat.com.

	Sell Ratings	Hold Ratings	Buy Ratings	Strong Buy Ratings	Rating Score
OFS Capital	1	2	0	0	1.67
Morgan Stanley Direct Lending Fund	0	6	1	0	2.14

OFS Capital currently has a consensus price target of $7.00, indicating a potential upside of 75.44%. Morgan Stanley Direct Lending Fund has a consensus price target of $15.17, indicating a potential upside of 10.95%. Given OFS Capital’s higher possible upside, analysts plainly believe OFS Capital is more favorable than Morgan Stanley Direct Lending Fund.

About OFS Capital

OFS Capital Corporation is a business development company specializing in direct and fund investments as well as add-on acquisitions. It provides flexible capital solutions primarily through debt capital and to a lesser extent, minority equity investments serving the needs of U.S.-based middle-market companies across a broad array of industries. It does not invest in operational turnarounds or start-up businesses. For direct, it specializes in debt and structured equity investments, recapitalizations and refinancing, management and leveraged buyouts, acquisition financings, ownership transition, shareholder liquidity events, growth capital, independent sponsor transactions, ESOPs, and minority investments in the lower middle market companies. It invests in the aerospace and defense, business services, consumer products and services, construction & building, durable goods, capital equipment, automotive, food and beverage, healthcare & pharmaceutical, specialty chemicals, transportation cargo and logistics, value added distribution, franchising, and industrial and niche manufacturing sectors. The firm invests in companies based in United States. It seeks to invest between $3 million and $35 million, revenues between $15 million and $300 million, annual EBITDA between $5 million and $50 million, and Enterprise value between $10 million and $500 million. The firm seeks to invest in companies with debt investment values between $5 million and $25 million. The fund uses senior secured, unitranche loans, first-lien, second lien, subordinated/ mezzanine loans, warrants, and preferred equity securities and common equity securities. It prefers to take a minority as well as majority stake in the investments made. It also co-invests with its partners for additional capital.

About Morgan Stanley Direct Lending Fund

Morgan Stanley Direct Lending Fund is a business development company. It is a non-diversified, externally managed specialty finance company focused on lending to middle-market companies. Morgan Stanley Direct Lending Fund is based in NEW YORK.