Critical Partnerships And Expanding ETF Offerings Fuel Revenue Growth And Competitive Edge

Key Takeaways

• Strategic partnerships and acquisitions are integral to reducing costs and expanding revenue through inorganic growth and enhanced competitive positioning.
  
• Investments in active ETFs and a strong investment performance rating from Morningstar are expected to attract more assets and drive revenue growth.
  
• Victory Capital Holdings faces integration risks, potential delay in achieving expense synergies, revenue impacts from equity outflows, dependency on new product performance, and risks from capital allocation to M&A.

Catalysts

Operates as an asset management company in the United States and internationally.

• The strategic partnership with Amundi is expected to generate significant expense synergies estimated at $100 million post-closing, positively influencing net margins through reduced operational costs.
  
• Launching new products, especially active ETFs in response to market demands and client needs, is expected to drive revenue growth by expanding the company's asset base and attracting more inflows.
  
• Investments in the ETF platform, including hiring dedicated resources and engaging in distribution partnerships, aim to enhance growth in assets under management, thereby increasing revenue.
  
• Deployment of $1.6 billion for strategic acquisitions since IPO, leading to significant growth in earnings and free cash flow, indicates a continuous strategy for inorganic growth, which is expected to contribute to future revenue and earnings increase.
  
• The reported strong investment performance with a majority of AUM in mutual funds and ETFs earning 4 or 5-star ratings from Morningstar is likely to attract more client assets, boosting revenue and enhancing the company's competitive position in the market.
  

Assumptions

• Analysts are assuming Victory Capital Holdings's revenue will grow by 29.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 27.9% today to 33.8% in 3 years time.
• Analysts expect earnings to reach $627.9 million (and earnings per share of $5.61) by about September 2027, up from $237.2 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 6.5x on those 2027 earnings, down from 14.0x today. This future PE is lower than the current PE for the US Capital Markets industry at 20.6x.
• Analysts expect the number of shares outstanding to decline by 1.36% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.03%, as per the Simply Wall St company report.

Risks

• The pending acquisition of Amundi's U.S. business introduces integration risks, which could affect net margins and earnings due to the challenges that often accompany the merging of large businesses.
  
• The forecasted $100 million of expense synergies post-Amundi transaction closing may not materialize as expected or could take longer to achieve, potentially impacting EBITDA and net margins if the anticipated savings do not materialize on schedule.
  
• The company is experiencing outflows in some of its equity strategies due to investor rebalancing, suggesting that revenue could be adversely affected if these trends persist or exacerbate.
  
• Victory Capital's strategic emphasis on expanding its ETF offerings and fixed income products hinges on market reception and performance. If these products do not perform or attract assets as anticipated, revenue growth may be impeded.
  
• The company's capital allocation towards inorganic growth initiatives and M&A poses risks if these investments do not yield expected returns, potentially impacting earnings and the effectiveness of capital utilization.

Valuation

• The analysts have a consensus price target of $53.89 for Victory Capital Holdings 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 $59.0, and the most bearish reporting a price target of just $40.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.9 billion, earnings will come to $627.9 million, and it would be trading on a PE ratio of 6.5x, assuming you use a discount rate of 7.0%.
• Given the current share price of $51.18, the analyst's price target of $53.89 is 5.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.