Each month, GuruFocus writer Vera Yuan researches and presents lists of stocks that manage to pass multiple screeners, in different regions (How Many Stocks Can Pass GuruFocus Value Screeners? – March 6, 2015).
For investors, it’s an effective way of screening the screeners. While individual screeners do narrow the realm of possible investments, they still leave us with long lists of potential names. Choosing from among companies that get through two or more screens adds one more level of quality (although, there may be duplications among the screeners), and reduces the field to a handful.
As we see below, the article found just five American stocks that made the cut:
One of the five is Westwood Holdings Group Inc. (WHG, Financial), which gets the nod from the Undervalued Predictable, Buffett Munger and Low Price/Sales screeners. Inclusion in the first two of these screeners tells us the company has generated notable earnings, generated them consistently, and that its share price is undervalued or fair-valued.
Westwood is an asset management company with a family of mutual funds and several associated businesses. It is a small cap, but one that is growing quickly. Most of its assets under management are in the United States, but it is also expanding internationally.
This chart illustrates that growth, showing revenue on the green line and EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) on the blue line:
History
1974: Westwood Trust established
1983: Westwood Management founded by Susan M. Byrne
2002: Begins trading on the New York Stock Exchange (WHG, Financial)
2005: First two mutual funds launched
2011: Adds three new mutual funds
2012: Three more funds added
2012: Westwood International founded
2014: Ranks first among companies with 100 to 499 employees in the Pension & Investments annual ranking of Best Places to Work in Money Management; adds three more mutual funds.
2015: Acquisition of Woodway Financial Advisors, a private wealth and trust company, AUM $1.6 billion at December 31, 2014
History based on information at the company website and 10-K report for 2015..
Comments: A company that was cobbled together over the years, but also one that has integrated itself successfully, and grown rapidly.
The Westwood business
WHG describes itself, at its website, as, “Westwood is a global asset management firm serving institutional investors, private wealth clients and financial intermediaries.”
The publicly traded company operates through three subsidiaries (and its assets are the capital stock of these three):
- Westwood Management Corp. (“Westwood Management”): In its own words, it “...provides investment advisory services to large institutions, including corporate retirement plans, public retirement plans, endowments and foundations. Institutional separate account minimums depend on the strategy offered but generally range from $10 million to $25 million.”
- Westwood Trust: “...provides trust and custodial services and participation in self-sponsored common trust funds to institutions and high net worth individuals.”
- Westwood International Advisors Inc. (“Westwood International”): “..provides investment advisory services to large institutions and pooled investment vehicles as well as subadvisory services to the National Bank Westwood Funds, which are mutual funds offered by National Bank of Canada. Westwood International also provides investment advisory services to an Ireland-domiciled UCITS fund.” .
The company offers a “family” of 10 mutual funds which embrace a conservative investment philosophy, “... a “value” investment style focused on achieving superior long-term, risk-adjusted returns by investing in companies with high levels of free cash flow, improving returns on equity and strengthening balance sheets that are well positioned for growth but whose value is not fully recognized in the marketplace.”
It adds, at its website, “We go to great lengths to reduce risk and maintain transparency in our clients’ portfolios, as well as in our business.”
Underlying that philosophy is a conservative culture, “We maintain a liquid balance sheet with no debt and at least one year’s worth of operating expenses in cash at all times. We do not employ leverage.”
And, “Our employees’ goals are aligned with the success of our clients and shareholders – because they too are shareholders. All employees of the firm are stockholders and hold 25% of Westwood’s outstanding stock.”
WHG generates revenue from fees, which are based on a percentage of assets under management.
Revenue
As the following chart from the 10-K for 2014 shows, the company earned the vast majority of its revenue from advisory fees on asset-based funds.
Overall, the company’s revenues grew 23% from fiscal 2013 to fiscal 2014.
Its 10 largest customers accounted for more than 20% of its revenues in 2014.
Competitors
Westwood says, in its 10-K for 2014, that it faces, “...substantial and growing competition in all aspects of our business.”
Yahoo! Finance lists its competitors as FMR LLC (privately held), Franklin Resources, Inc. (BEN, Financial), and Janus Capital Group, Inc. (JNS, Financial). It puts the total market cap of the Asset Management industry at $945,690,000 million and says Westwood represents almost half of that, at $455,350,000 million.
GuruFocus adds competitors Ameriprise Financial Inc (AMP, Financial), Affiliated Managers Group Inc (AMG, Financial), BlackRock Inc. (BLK, Financial), and Bank of New York Mellon Corp (BK, Financial).
Other:
WHG is incorporated in Delaware, and based in Dallas, Texas.
At the end of 2013, it had 130 employees, 116 in the U.S.A. and 14 in Canada.
Comments: Westwood describes itself as an asset management company while many of us would describe it as a mutual fund company. It is somewhat diversified, but the majority of its revenue comes from advisory fees from the funds it manages, sells and distributes. It faces significant competition but appears to have solidified an established place within the industry.
Opportunities, risks and growth
Opportunities (Investor Presentation, May 4, 2014):
It sees what it calls "significant capacity in seasoned products," which presumably means there are still growth opportunities in its existing funds and businesses, and in particular opportunities to find efficiencies and higher net operating margins.
In its subadvisory markets, it sees growth through its existing distribution and infrastructure.
Continuing organic growth of AUM through existing funds. Given its recent history, we might also include the development of new funds and potential acquisitions.
In the private wealth area, it foresees the development of new products, an expanded wealth platform in new markets and strategic acquisitions.
Not specifically included in the presentation is ongoing growth of the American economy, which should bring in new fund buyers as well as bigger investments from existing clients.
Risks (10-K for 2014):
Regulations governing the financial industry tops Westwood’s list of risk factors, and those regs include the Investment Advisers Act, the Investment Company Act, and anti-money laundering laws. Failure to comply could lead to materially significant penalties. Of course, it also faces regulatory risks in each of the countries in which it operates, or will operate in in the future. It notes, in the 10-K, “We devote considerable time and resources to both domestic and international compliance.”
Much of its revenue comes from fees, which are a percentage of assets under management. Clients might reduce their holdings and WHG’s AUM, if its investment performance, or the performance of the market as a whole, disappoints them.
Investment management is a highly competitive and innovative market; if other firms develop new products or services that investors consider more attractive, Westwood could be harmed.
Acquisition remains one of the core growth strategies, and every acquisition brings with it several risks, including failure to integrate and failure to reap synergies. In addition, acquisitions may also bring hidden liabilities.
Legal and litigation risks: In 2012, for example, it faced lawsuits from another asset management company when it recruited staff in Canada.
Growth
Here’s what the company has done so far, with revenue on the green line and EBITDA iEarnings Before Interest, Taxes, Depreciation, and Amortization) on the blue line:
Another perspective comes from the company’s Investor Day presentation:
Westwood does not provide guidance, nor does Yahoo! (YHOO, Financial) Finance provide analysts’ estimates for this year and next year.
However, the company has said that it is focused on building the foundation of a firm in terms of personnel and infrastructure to support a much larger business. So, we will assume it plans more of the same for at least the next five years. (10-K for 2014)
Its acquisition of Woodway Financial Advisors should help grow earnings; CEO Casey reported in the Fourth Quarter and 2014 Results press release that the Woodway is expected to be accretive to this year’s earnings.
Comments: No doubt this is a growth company, with strong revenue and earnings growth in the past five years. It sees opportunities for more growth, and barring another major financial collapse, the odds are good it can deliver. Its opportunities and risks are generally common across the industry.
Management
Founder and Chairman of the Board: Susan M. Byrne, age 67, has held various senior management positions. In addition, she has served as a member of: the Board of Presbyterian Communities & Services Foundation; the Board of the University of Texas Investment Management Company; and as a member of the Board of Trustees for the City of Dallas Employees Retirement Fund.
President, Chief Executive Officer,and Director: Brian O. Casey, age 50, has served as chief executive officer of Westwood since January 2006; he joined the company in 1992; outside service includes being a member of the Governor’s Business Council for the State of Texas.
Chief Financial Officer, Interim Principal Accounting Officer: Tiffany B. Kice, age 47; prior to joining WHG, she served for 15 years as an audit partner at KPMG LLP.
Board of Directors: A seven-member board with two insiders (Byrne and Casey) and five independent directors. Independent members have backgrounds in banking, entertainment/dining and finance; one independent is a former president of the Federal Reserve Bank of Dallas.
ISS Governance QuickScore: Receives a score of 7 on a scale that ranges from 1 to 10, and which ISS describes this way: “A decile score of 1 indicates lower governance risk,while a 10 indicates higher governance risk.” It receives red flags for Meeting and Voting Related Issues, Equity Risk Mitigation, and Controversies.
Management profile based on information provided at Reuters.com.
Comments: A management team and board that have done well in the past; relatively young key officers suggest continuity should Chairman Byrne retire; and board members have connections that should prove useful in steering the company.
Ownership
Gurus: Four of the leading investors followed by GuruFocus own shares in Westwood Holdings Group: Third Avenue Management (Trades, Portfolio), Chuck Royce (Trades, Portfolio), Jim Simons (Trades, Portfolio), and Mario Gabelli (Trades, Portfolio); Royce has the biggest holding, at 766,562 shares (as of December 31, 2014), which represents 9.1% of all outstanding shares.
Institutional Investors: These pension funds, mutual funds, banks, insurance companies, and other pooled investment vehicles, own a bit more than 61% of the outstanding shares. This chart from nasdaq.com illustrates the point:
Data from nasdaq.com also shows Chuck Royce (Trades, Portfolio)/Royce & Associates LLC as the single largest shareholder.
Short interests: Currently at a low of 1.4%, and the following GuruFocus chart shows the shorts in historical context over the past decade:
Insiders: GuruFocus puts the insiders stake at 13% (this figure is inconsistent with the company’s claim of 25% noted above, but not significant for our analytical purposes), and as its table/chart shows. Founder/Chairman Byrne and CEO Casey, along with other senior officers, have significant stakes in the company:
Comments: The fortunes of senior management are aligned with those of investors; also note the strong showing by institutional investors and gurus (particularly Chuck Royce (Trades, Portfolio)), and the minimal interest among shorts.
WHG by the Numbers
Comments: A relatively small company in terms of market cap, although, as we’ve seen, it carries some heft when it comes to Assets Under Management; the share price is roughly midway between the 52 week high and low; strong ROE; and a strong, sustainable dividend.
Financial strength
Westwood gets Financial Strength and Growth & Profitability scores that are well above average: 9/10 on each:
Contributing to that is the company’s debt-free status. As many value investors have pointed out before, companies with no debt cannot go bankrupt, or at least the likelihood is extremely unlikely. Management also reported, in its Fourth Quarter and 2014 Results press release that it had $98 million in cash and investments at the end of 2014.
As the following chart shows, free cash flow has also trended upward after taking a dive during the 2008 financial crisis:
Comments: With no debt, Westwood is well positioned for any type of economic weather in the near term, and that’s supported by its strong free cash flow.
Valuation
At the close of trading on March 20, 2015, WHG appeared on the Undervalued Predictable and Buffett Munger screeners at GuruFocus. The relatively few stocks that make it onto these lists do so because of two key strengths: the consistency of their earnings and and their low or relatively low PEG ratio.
Consistency means having at least a 4 (out of 5) Star rating for Predictability. Westwood sits among the elite on this metric, with a full 5-Star rating. As of March 20, 2015 only 121 of the more than 5,600 stocks with predictability ratings at GuruFocus had 5 stars; that puts it in the top 2% of stocks for predictability.
The other critical metric for reaching these two screeners is the PEG or PEPG ratio, which is calculated by dividing the P/E ratio by the average five-year EBITDA growth rate. The end result, the PEG ratio, gives us better context than the P/E by itself. While the P/E gives us price in relation to current earnings, the PEG gives us price in relation to the growth of earnings over the past five years.
WHG sports a PEG ratio of 0.92 (as of the close of trading, March 20, 2015), making it undervalued. A ratio of less than 1.0 is considered under-valued, a ratio between 1.0 and 2.0 is considered fair-valued, and a ratio greater than 2.0 is considered overvalued.
In recent weeks, I’ve profiled a couple of other mutual fund companies, or at least companies built around mutual funds: Waddell & Reed Financial, Inc. (WDR, Financial) and BlackRock, Inc. – see Should You Buy The Mutual Fund Company Instead Of The Funds? and BlackRock: A Fair-Value Giant With Predictable Earnings. Both of these companies had made their way to the Buffett Munger screener as well.
Here’s how they compare at the moment:
Note: You will notice some small discrepancies between the P/E and ROE shown here and those shown in the By the Numbers section above. Data for the key statistics table came from Yahoo! Finance, while those in this table came from GuruFocus; these differences are not significant.
Comments: As we can see, WHG scores better across the board than BLK at the moment. But, had WDR held its previous predictability rating, it might have trumped both WDR and BLK. In any case, Westwood offers investors a very good combination of predictability and value.
Conclusions
This stock should have the attention of those who like capital appreciation and a good income while they wait.
Fundamentally, it also has a number of attractions. As we noted at the beginning, it has the distinction of making it through three GuruFocus screeners, a major accomplishment for any stock. In this case, the screeners were the Undervalued Predictable, Buffett Munger, and Low Price/Sales.
We note, though, that it is still a small cap with all the advantages and disadvantages that involves.
Still, with average EBITDA growth of 18.6% over the past half decade, this may not be a small cap for long.
