On Thursday, RBC Capital Markets adjusted its outlook on Morgan Stanley Direct Lending (NYSE: MSDL), raising the price target to $23.00 from the previous $21.00 while keeping an Outperform rating on the stock. The adjustment follows a revision of estimates after the first quarter.
The company, which went public not long ago, has been actively expanding its portfolio while maintaining strict underwriting standards. Analysts at RBC Capital highlight Morgan Stanley Direct Lending's strategic advantage in leveraging Morgan Stanley's established relationships and network. This creates a unique origination and sourcing channel that sets the company apart from its peers.
Analysts also point to Morgan Stanley Direct Lending's potential for a higher-than-average dividend yield for the year, estimated at around 11%. This is seen as a positive indicator for investors seeking income. Furthermore, the firm is expected to achieve a return on equity (ROE) comparable to that of its peers, despite maintaining a conservative portfolio composition, with approximately 95% in first lien loans.
The revised price target reflects an anticipated total return of roughly 15%. The Outperform rating is sustained based on the company's strong performance and promising outlook in the competitive lending market.
InvestingPro Insights
Recent data from InvestingPro reflects a nuanced picture of Morgan Stanley Direct Lending's financial health and market performance. With a market capitalization of $1.96 billion, the company stands as a significant player in the industry. Investors may be particularly interested in the robust dividend yield of 9.01%, which aligns with RBC Capital's analysis of the company's potential for above-average income returns. The ex-date for the last dividend was March 27, 2024, marking a key date for income-focused investors.
From a performance standpoint, Morgan Stanley Direct Lending has experienced a 9.95% total return year-to-date, which is consistent with the optimistic view expressed by RBC Capital Markets. In terms of valuation, the price is hovering near its 52-week high at 94.58% of that peak, with a closing price of $22.8, just below the fair value estimate of $22 as per analyst targets.
However, InvestingPro Tips suggest caution with two analysts having revised their earnings downwards for the upcoming period, which may indicate potential headwinds. Additionally, the company suffers from weak gross profit margins and a valuation that implies a poor free cash flow yield. For investors looking to delve deeper into these aspects, there are additional InvestingPro Tips available, offering a comprehensive understanding of Morgan Stanley Direct Lending's financial outlook. Use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription for further insights.
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