Inclusion In S&P MidCap 400 Index Will Attract Institutional Investors

Key Takeaways

• Inclusion in the S&P MidCap 400 Index may increase institutional investments, boosting stock demand and positively impacting valuation and earnings.
  
• Expanding specialized funds and strategic partnerships with innovative products could drive future revenue and long-term growth.
  
• Regulatory changes and increased competition might challenge Hamilton Lane's revenue growth and earnings consistency, accompanied by rising expenses potentially straining net margins.

Catalysts

A private equity and venture capital firm specializing in early venture, emerging growth, turnaround, middle market, mature, mid-venture, bridge, buyout, distressed/vulture, loan, mezzanine in growth capital companies.

• Hamilton Lane's inclusion in the S&P MidCap 400 Index may attract more institutional investors, potentially increasing demand and liquidity for its stock, which could positively impact the company's valuation and earnings.
  
• The firm's strong growth trajectory, with management and advisory fee revenue up 21% year-over-year, suggests potential for future revenue growth as demand for specialized fund products and customized separate accounts continues to rise.
  
• Significant expansion in their specialized funds and Evergreen platform, with fee-earning AUM increasing by 14%, is likely to drive future revenue and earnings growth, especially with their venture and impact funds gaining traction among investors.
  
• The strategic technology partnership with Northern Trust and the introduction of innovative products like infrastructure Evergreen funds indicate potential future revenue boosts as they expand offerings and leverage partnerships to access new clients and markets.
  
• Continued success in fundraising, such as with their venture and strategic opportunities funds, suggests a rising capacity to attract and deploy capital, which can enhance fee-related earnings and drive long-term growth.

Hamilton Lane Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hamilton Lane's revenue will grow by 11.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 28.0% today to 42.3% in 3 years time.
• Analysts expect earnings to reach $381.4 million (and earnings per share of $6.17) by about December 2027, up from $181.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 37.5x on those 2027 earnings, which is the same as it is today today. This future PE is greater than the current PE for the US Capital Markets industry at 23.4x.
• Analysts expect the number of shares outstanding to grow by 3.37% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.87%, as per the Simply Wall St company report.

Hamilton Lane Future Earnings Per Share Growth

Risks

• The potential impact of regulatory changes, such as those affecting 401(k) account access to private markets, may not materialize as expected, causing uncertainty regarding future revenue growth opportunities in this space.
  
• Increased competition in the market for alternative investment products and specialized funds could pressure Hamilton Lane's ability to maintain its current growth rate in fee-related earnings and net margins.
  
• Variability in retro fees and other non-recurring revenue sources creates fluctuations in quarter-to-quarter financials, suggesting potential instability in earnings consistency.
  
• Rising compensation and benefits expenses, linked to workforce growth and incentive fee-related payouts, could strain net margins if not managed in line with revenue growth.
  
• Limited visibility into the uptake of competing alternative investment products might affect the firm's ability to sustain momentum in its Evergreen product platform and associated revenues.

Valuation

• The analysts have a consensus price target of $192.17 for Hamilton Lane based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $215.0, and the most bearish reporting a price target of just $175.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $900.7 million, earnings will come to $381.4 million, and it would be trading on a PE ratio of 37.5x, assuming you use a discount rate of 6.9%.
• Given the current share price of $163.41, the analyst's price target of $192.17 is 15.0% 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.