Expanding Global Credit And Investment Solutions Will Unleash Future Opportunity

Key Takeaways

• Strategic focus on expanding segments has driven significant revenue growth, with expectations for continued expansion, especially in Global Credit.
  
• Share repurchase strategies and operational improvements are set to enhance shareholder value and improve earnings outlooks.
  
• Economic uncertainties and competitive challenges could hinder Carlyle Group's growth, affecting management fees and revenue from private equity and direct lending segments.

Catalysts

An investment firm specializing in direct and fund of fund investments.

• The Carlyle Group's strategic focus on expanding its Global Credit and Insurance, Global Investment Solutions, and Global Wealth and Capital Market segments has resulted in a 40% increase in revenues over the last three years, which is a powerful catalyst for future revenue growth.
  
• There is a large addressable market identified in asset-based and asset-backed finance, valued at $25 trillion globally. Carlyle's Global Credit segment has already shown 22% revenue growth in 2024 and this segment is expected to continue expanding further, driving revenue and earnings.
  
• The company's Global Investment Solutions business saw a 44% increase in fee revenue. New products and the broadening of their platform are expected to sustain fee-related earnings growth.
  
• Carlyle's recent implementation of a $1.4 billion share repurchase authorization reflects management's belief that their share price is undervalued. Continued buybacks could enhance EPS growth and provide shareholder value.
  
• Operational improvements, such as restructuring compensation strategies to better align with performance, enhancing operational efficiencies, and launching new wealth products, are expected to improve net margins and earnings, supporting bullish projections for growth.

Carlyle Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Carlyle Group compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Carlyle Group's revenue will grow by 1.7% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 21.5% today to 35.5% in 3 years time.
• The bullish analysts expect earnings to reach $1.9 billion (and earnings per share of $5.49) by about July 2028, up from $1.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 19.3x on those 2028 earnings, down from 19.9x today. This future PE is lower than the current PE for the US Capital Markets industry at 29.1x.
• Analysts expect the number of shares outstanding to grow by 1.26% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.82%, as per the Simply Wall St company report.

Carlyle Group Future Earnings Per Share Growth

Risks

• The Global Private Equity management fees declined 7% in 2024 and are expected to continue to face a more modest decline in 2025, which can impact revenue from this segment.
  
• The competitive landscape and the comparatively small scale of Carlyle's Direct Lending business relative to its peers may hinder its ability to grow as significantly as expected, potentially affecting revenue growth.
  
• The expectation that CLO business within Global Credit will face headwinds in the early part of 2025, impacting management revenue from this area.
  
• A large amount of $23 billion in pending fee-earning AUM suggests that significant capital is not yet activated, potentially delaying the realization of management fee revenue in the near term.
  
• Economic uncertainties, such as the federal reserve's interest rate policies and market volatility affecting public equities, particularly in China, could adversely impact portfolio valuations and net earnings.

Valuation

• The assumed bullish price target for Carlyle Group is $75.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Carlyle Group's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $75.0, and the most bearish reporting a price target of just $44.11.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $5.3 billion, earnings will come to $1.9 billion, and it would be trading on a PE ratio of 19.3x, assuming you use a discount rate of 8.8%.
• Given the current share price of $59.71, the bullish analyst price target of $75.0 is 20.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.