Asset Management Companies – Two that still have room to rebound.
July 31st, 2009
Almost no industry group was slammed harder in the crash of 2008 – 2009 than the asset management companies. They suffered from both net asset withdrawals and huge mark-to-market reductions in the remaining assets under management [AUM] which slashed their earnings from record levels in 2007.
The stocks of the publicly traded managers were devastated. Here’s a chart showing some of the damage from the 2007 peaks to their recent troughs:
|
Company
|
2007-2008 Peak
|
2008-2009 Low
|
% Drop
|
|
Affiliated Mgrs. Group - AMG
|
$136.50
|
$17.90
|
-86.9%
|
|
Alliance Bernstein – AB
|
$94.90
|
$10.12
|
-89.3%
|
|
Eaton Vance – EV
|
$50.00
|
$11.90
|
-76.2%
|
|
Federated Investors – FII
|
$45.00
|
$15.80
|
-64.9%
|
|
Franklin Resources – BEN
|
$145.60
|
$37.10
|
-74.5%
|
|
Janus Capital – JNS
|
$37.10
|
$3.70
|
-90.0%
|
|
Legg Mason – LM
|
$110.20
|
$10.40
|
-90.5%
|
|
T. Rowe Price - TROW
|
$70.20
|
$20.10
|
-71.4%
|
|
Calamos Asset Mgt. - CLMS
|
$34.61
|
$2.55
|
-92.6%
|
While the revenues and earnings suffered greatly all the firms appear financially sound and all have made nice rebounds since the March lows.
|
Company
|
2008-2009 Low
|
July 31, 2009
|
% Rebound
|
|
Affiliated Mgrs. Group - AMG
|
$17.90
|
$66.92
|
+273.8%
|
|
Alliance Bernstein – AB
|
$10.12
|
$19.95
|
+97.1%
|
|
Eaton Vance – EV
|
$11.90
|
$28.50
|
+181.6%
|
|
Federated Investors – FII
|
$15.80
|
$26.10
|
+65.2%
|
|
Franklin Resources – BEN
|
$37.10
|
$87.10
|
+134.8%
|
|
Janus Capital – JNS
|
$3.70
|
$13.40
|
+262.2%
|
|
Legg Mason – LM
|
$10.40
|
$27.85
|
+167.8%
|
|
T. Rowe Price - TROW
|
$20.10
|
$46.70
|
+132.3%
|
|
Calamos Asset Mgt. - CLMS
|
$2.55
|
$14.00
|
+449.0%
|
I had written positively about AB, FII, BEN and CLMS previously and have recorded big gains by picking up shares when fear was running rampant.
Alliance Bernstein reported earnings today. While EPS, not surprisingly, was down from a year ago they came in at $0.41 /share – six cents better than the expected $0.35 consensus view. Sequential AUM were up 9% as of June 30th and they certainly should have risen nicely with the wonderful market action we’ve seen this month. AB is heavily involved in the equity markets and should benefit greatly as stocks rebound.
In the ten-year market cycle from 1999 – 2008 Alliance Bernstein never earned less than $2.12 per unit (they trade as a master limited partnership) and had peak earnings of $4.33 (in 2007). Value Line sees normalized earnings power of $2.85 /unit within their 3 – 5 year projection window. That seems reasonable to me based on past history. AB’s ten-year median P/E has been 16x. A return to even 14x those normalized earnings would lead to a $40 share price or just about double today’s $19.95 quote.
As a master limited partnership AB must pay out the bulk of its annual earnings to its holders each year. In the 10-year period 1999- 2008 this distribution ranged from an annual low of $1.19 (in 2004) to a high of $4.75 in 2007’s bull market. By the time things get back to normal it is likely to expect at least a $2.50 /unit annual distribution again. That would equate to 12.53% of today’s unit price. That’s quite attractive in our present ‘low interest rate’ world. I would predict at least $1.05 for the current year based on a 90% payout ratio on Zacks’ 2009 estimate of $1.17/unit.
I’m a buyer of Alliance Bernstein today on the weakness following the earnings report. Shares are down around 8% today on what I consider decent news. I’m also a seller of puts for January 2010 at strike prices of $17.50, $20.00 and $22.50.
Here are some typical trades that have been available today:
|
Strike Price (Jan. 2010 exp.)
|
Put Premium Received
|
Net Cost (if Put)
|
|
$17.50
|
$1.60
|
$15.90
|
|
$20.00
|
$2.75
|
$17.25
|
|
$22.50
|
$4.20
|
$18.30
|
I’d be happy to own more AB at any of those net prices.
I did a similar play with Federated Investors when they reported their earnings on July 24th and the shares fell into the $22 - $23 range. FII has traded above $26 today. See my earlier write-up on FII for full details.
In summary:
I like this group for long-term gains but I’d rather play the names that have not yet made the big moves off their lows. Alliance Bernstein is my favorite of the group at today’s price (it was a few dollars higher just a couple of days ago).
I’d recommend buying the units and/or selling some puts. With upside this substantial I’d wait for a nice move up before writing any covered calls. You should receive at least 5% - 8% in distributions over the next 12 months with the distinct possibility for much bigger payouts in the medium to long term.
Disclosure: Author is long Alliance Bernstein, Calamos, Franklin Resources, and T. Rowe Price shares and short their options.
BofA-Merrill raises Janus Capital, Calamos to buy
Sept 25 (Reuters) - Banc of America-Merrill Lynch upgraded Janus Capital Group Inc (JNS.N) and Calamos Asset Management Inc (CLMS.O) to “buy,” saying an improving dollar might draw more investors to U.S. equity next year, benefiting the asset managers.
AllianceBernstein (AB): Q3 EPS of $0.67 beats by $0.22. Revenue of $806M (-5%) vs. $737M. AUM down 16% Y/Y to $498B.
Shares +3.8% after hours
Alliance Bernstein L.P. units surged from $19.95 to $29.03 from the posting date of July 31 through Jan. 15, 2010.
We made 45.5% plus substantial dividends over the 5.5 months since then.
All three suggested put sales (@ $17.50, $20 and $22.50 strike prices)ended up expiring worthless which was the best-case result for sellers like us.