Contrasting Ares Management (NYSE:ARES) and Capital Southwest (NASDAQ:CSWC)

Ares Management (NYSE:ARES) and Capital Southwest (NASDAQ:CSWC) are both finance companies, but which is the superior investment? We will contrast the two companies based on the strength of their dividends, valuation, analyst recommendations, risk, institutional ownership, profitability and earnings.

Analyst Recommendations

This is a breakdown of current recommendations and price targets for Ares Management and Capital Southwest, as provided by MarketBeat.

	Sell Ratings	Hold Ratings	Buy Ratings	Strong Buy Ratings	Rating Score
Ares Management	0	4	13	0	2.76
Capital Southwest	1	3	6	0	2.50

Ares Management presently has a consensus target price of $187.46, suggesting a potential upside of 26.87%. Capital Southwest has a consensus target price of $23.64, suggesting a potential upside of 13.07%. Given Ares Management’s stronger consensus rating and higher possible upside, analysts plainly believe Ares Management is more favorable than Capital Southwest.

Valuation and Earnings

This table compares Ares Management and Capital Southwest”s revenue, earnings per share (EPS) and valuation.

	Gross Revenue	Price/Sales Ratio	Net Income	Earnings Per Share	Price/Earnings Ratio
Ares Management	$5.36 billion	9.02	$463.74 million	$2.33	63.42
Capital Southwest	$132.24 million	9.09	$70.55 million	$1.61	12.99

Ares Management has higher revenue and earnings than Capital Southwest. Capital Southwest is trading at a lower price-to-earnings ratio than Ares Management, indicating that it is currently the more affordable of the two stocks.

Dividends

Ares Management pays an annual dividend of $4.48 per share and has a dividend yield of 3.0%. Capital Southwest pays an annual dividend of $2.32 per share and has a dividend yield of 11.1%. Ares Management pays out 192.3% of its earnings in the form of a dividend, suggesting it may not have sufficient earnings to cover its dividend payment in the future. Capital Southwest pays out 144.1% of its earnings in the form of a dividend, suggesting it may not have sufficient earnings to cover its dividend payment in the future. Ares Management has raised its dividend for 7 consecutive years and Capital Southwest has raised its dividend for 2 consecutive years. Capital Southwest is clearly the better dividend stock, given its higher yield and lower payout ratio.

Risk & Volatility

Ares Management has a beta of 1.45, indicating that its stock price is 45% more volatile than the S&P 500. Comparatively, Capital Southwest has a beta of 0.94, indicating that its stock price is 6% less volatile than the S&P 500.

Profitability

This table compares Ares Management and Capital Southwest’s net margins, return on equity and return on assets.

	Net Margins	Return on Equity	Return on Assets
Ares Management	9.47%	15.81%	3.69%
Capital Southwest	39.95%	14.17%	6.77%

Institutional and Insider Ownership

50.0% of Ares Management shares are owned by institutional investors. Comparatively, 23.4% of Capital Southwest shares are owned by institutional investors. 36.9% of Ares Management shares are owned by company insiders. Comparatively, 2.8% of Capital Southwest shares are owned by company insiders. Strong institutional ownership is an indication that endowments, large money managers and hedge funds believe a company is poised for long-term growth.

Summary

Ares Management beats Capital Southwest on 12 of the 17 factors compared between the two stocks.

About Ares Management

Ares Management Corporation operates as an alternative asset manager in the United States, Europe, and Asia. The company's Tradable Credit Group segment manages various types of investment funds, such as commingled and separately managed accounts for institutional investors, and publicly traded vehicles and sub-advised funds for retail investors in the tradable and non-investment grade corporate credit markets. Its Direct Lending Group segment provides financing solutions to small-to-medium sized companies. The company's Private Equity Group segment focuses on majority or shared-control investments primarily in under-capitalized companies. Its Real Estate Group segment invests in new developments and the repositioning of assets, with a focus on control or majority-control investments; and originates and invests in a range of self-originated financing opportunities for middle-market owners and operators of commercial real estate. The firm was previously known as Ares Management, L.P. Ares Management Corporation was founded in 1997 and is headquartered in Los Angeles, California with additional offices in the United States, Europe and Asia. Ares Management GP LLC is the general partner of the company.

About Capital Southwest

Capital Southwest Corporation is a business development company specializing in credit and private equity and venture capital investments in middle market companies, mezzanine, later stage, mature, late venture, emerging growth, buyouts, industry consolidation, recapitalizations and growth capital investments. It does not invest in startups, publicly traded companies, real estate developments, project finance opportunities, oil and gas exploration businesses, troubled companies, turnarounds, and companies in which significant senior management is departing. In lower middle market, the firm typically invests in growth financing, bolt-on acquisitions, new platform acquisitions, refinancing, dividend recapitalizations, sponsor-led buyouts, and management buyouts situations. The investment structures are Unitranche debt, subordinated debt, senior debt, first and second lien debt, and preferred and common equity. The firm makes equity co-investments alongside debt investments, up to 20% of total check and only makes non-control investments. The firm is Industry agnostic, but it prefers to invest in Industrial manufacturing and services, value-added distribution, healthcare products and services, business services, specialty chemicals, food and beverage, tech-enabled services and SaaS models. The firm seeks to invest in energy services and products, industrial technologies, and specialty chemicals and products. Within energy services and products, the firm seeks to invest in each segment of the industry, including upstream, midstream and downstream, excluding exploration and production with a focus on differentiated products and services, equipment and tool rental, consumable products, and drilling and completion chemicals. Within industrial technologies, it seeks to invest in automation and process controls, handling and packaging equipment, industrial filtration and fluid handling, measurement, monitoring and testing, professional tools, and sensors and instrumentation. Within and specialty chemicals and products, the firm seeks to invest in businesses that develop and manufacture highly differentiated chemicals and products including adhesives, coatings and sealants, catalysts and absorbents, cosmeceuticals, fine chemicals, flavors and fragrances, performance lubricants, polymers, plastics and composites, chemical dispensing and filtration equipment, professional and industrial trade consumables and tools, engineered solutions for HVAC, plumbing, and electrical installations, specified high performance materials for fire protection and oilfield applications. It may also invest in exceptional opportunities in building products. The firm seeks to invest in the United States and North America. The firm seeks to make investments ranging from $5 million and $25 million in securities. It leads $5 to $70 million financings, Its Target holds of $5 million and $45 million, and the firm is willing to backstop up to $55mm with an active network of co-investors. It seeks to invest in the firm with minimum EBITDA is $3 million and $25 million. In addition to making direct investments, the firm allocates capital to syndicated first and second lien term loans in the upper middle market. Criteria for Upper Middle Market Syndicated 1st Lien is EBITDA Size more than $30 million, Closing Leverage greater than 4 times, investment hold size between $5 million and $7 million up to $15mm with senior loan fund, investment yield greater than 6.5%. Criteria for Upper Middle Market Syndicated 2nd Lien is EBITDA Size more than $50 million, Closing Leverage greater than 6 times, investment hold size between $5 million and $7 million, investment yield greater than 9%. It prefers to take a majority and minority stake. The firm has the flexibility to hold investments for very long period in its portfolio companies. It may also invest through warrants. The firm prefers to take Board participation in its portfolio companies. Capital Southwest Corporation was founded on April 19, 1961 and is based in Dallas, Texas.