Investments In Europe And Infrastructure Will Position The Company For Future Competitiveness

Key Takeaways

• Strategic investments in enterprise operations and client retention are enhancing profitability and competitiveness, leading to potential revenue and margin growth.
  
• Capital allocation, including share repurchases and acquisitions, aims to boost shareholder value and enhance EPS.
  
• Structural and revenue challenges loom for SEI due to asset outflows, compensation costs, and market shifts towards passive funds and alternative cash options.

Catalysts

A publicly owned asset management holding company.

• SEI has demonstrated consistent momentum in net sales events, nearly doubling from 2022 levels, and these sales are broad-based, coming from both existing and new clients globally, which is likely to positively impact future revenue growth.
  
• The company's strategic shift to an enterprise mindset and investments in regional banking and global operations are enhancing client engagement and retention, potentially leading to improved net margins.
  
• Continued investment in infrastructure, scale, client experience, and regulatory capabilities, especially in Europe, positions SEI for sustained competitiveness and revenue growth.
  
• The alternative investment product demand, particularly in the Investment Managers business, is driving growth in assets under management and administration, which should support future earnings.
  
• SEI's capital allocation strategy, including significant share repurchases and investments in acquisitions such as LifeYield, aims to enhance shareholder value and improve earnings per share (EPS) over time.

SEI Investments Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SEI Investments's revenue will grow by 5.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 27.3% today to 28.5% in 3 years time.
• Analysts expect earnings to reach $716.3 million (and earnings per share of $6.02) by about March 2028, up from $581.2 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 16.2x on those 2028 earnings, down from 16.4x today. This future PE is lower than the current PE for the US Capital Markets industry at 23.2x.
• Analysts expect the number of shares outstanding to decline by 3.38% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.08%, as per the Simply Wall St company report.

SEI Investments Future Earnings Per Share Growth

Risks

• SEI faces structural headwinds, particularly in the institutional investor space, due to high funding status leading clients to annuitize, which could lead to continued asset outflows and affect revenue.
  
• The elevated incentive compensation costs, despite being a one-time event, highlight the potential for increased expenses impacting operating margins and net income if similar rewards are given in response to achieving future success.
  
• The decline in performance fees for LSV, due to net outflows and market depreciation, indicates a risk to revenue from its active asset management in an environment where movement to passive funds continues.
  
• There is potential pressure on margins from the investments required to augment teams and infrastructure ahead of onboarding new clients, where the cost hits the income statement before revenue is realized.
  
• SEI's revenue from its Integrated Cash Program might slow as clients explore alternative cash options, moderated by expected decreasing short-term interest rates, affecting net interest income.

Valuation

• The analysts have a consensus price target of $83.0 for SEI Investments 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 $99.0, and the most bearish reporting a price target of just $44.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.5 billion, earnings will come to $716.3 million, and it would be trading on a PE ratio of 16.2x, assuming you use a discount rate of 7.1%.
• Given the current share price of $74.95, the analyst price target of $83.0 is 9.7% 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.