Size and Scale of Affiliated Managers' Operations Will Increase

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Oct 03, 2014

In this article, let's take a look at Affiliated Managers Group Inc. (AMG, Financial), an $11.14 billion market cap company, which is asset management company with equity investments in a group of boutique investment management firms or Affiliates.

Great growth

We expect the firm to continue increasing its operations so we expect to double the growth rate, starting this year and also the next year. Some things that contribute to this are its global distribution network and the well-known product portfolio, which include some products with good return profiles, such as the global and international equities and alternative assets.

So what we are waiting to have is solid increases in revenue and profitability. Also, a free cash flow expanding from $750 million to more than $1 billion in the next five years is expected. Considering this and a $1.25 billion bank facility, the company can invest more or less $300 million per year into new affiliates. Further, the firm continues to focus on returning value to shareholders via share repurchases..

Some deals

The company in search of a better position in emerging and developing markets, it invested in firms like Harding Loevner, Value Partners (Trades, Portfolio) Group, and Trilogy Global Advisors. Since the financial crises, it has announced 12 deals of about $3 billion.

Risks

We think that revenue and profitability could be hurt by market movements or changes in fund flows. Further, due to its exposure to markets outside the U.S., some other risks arise like economic or political risks.

Revenues, margins and profitability

Looking at profitability, revenues increased by 17.59% and led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($1.77 vs $1.18). During the past fiscal year, the company increased its bottom line. It earned $6.49 versus $3.27 in the prior year. This year, Wall Street expects an improvement in earnings ($11.88 versus $6.49). The net income increased by 54.5% when compared to the same quarter one year ago, rising from $64.7 million to $100.0 million.

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker Company ROE (%)
AMG Affiliated Managers 18.18
KKR KKR & Co. 22.88
SEIC SEI Investments Company 24.79
LM Legg Mason Inc 6.53
TROW T. Rowe Price Group Inc 24.36
IVZ Invesco Ltd 11.66
 Industry Median 7.65

The company has a current ROE of 18.18% which is higher than the industry median and the ones exhibited by Legg Mason (LM, Financial) and Invesco (IVZ, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, KKR & Co. (KKR, Financial), SEI Investments (SEIC, Financial) and T. Rowe Price Group Inc. (TROW, Financial) could be the option. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.

03May20171351311493837491.png

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 27.8x, trading at a premium compared to an average of 19.3x for the industry. To use another metric, its price-to-book ratio of 4.30x indicates a premium versus the industry average of 1.04x while the price-to-sales ratio of 4.80x is below the industry average of 7.21x.

As we can see in the next chart, the stock price has an upward trend in the five-year period.

03May20171351321493837492.png

Final comment

We feel very comfortable with the company´s prospects due to its model which will provide a revenue growth, having value and growth investment styles, as well as fixed-income and alternative investments.

Moreover, the P/B Ratio is close to a 1-year low of 4.07 and the return on capital that significantly exceeds the industry average make me feel bullish on this stock.

Hedge fund guru George Soros (Trades, Portfolio) added this stock to his portfolios in the second quarter of 2014 as well as RS Investment Management (Trades, Portfolio).

Disclosure: Omar Venerio holds no position in any stocks mentioned