High-Growth Strategies Boost Prospects Despite Risks Of Shrinking Margins And Earnings Pressure

Key Takeaways

• Investments in high-growth areas and strategic U.S. wealth market expansion are set to drive organic growth and broaden investor access.
  
• Emphasis on share repurchases and growth in private markets AUM will enhance earnings per share and strengthen revenue and EBITDA margins.
  
• Aggressive share repurchase and reliance on thematic investment strategies may limit financial flexibility and expose earnings to market variability.

Catalysts

Through its affiliates, operates as an investment management company providing investment management services to mutual funds, institutional clients,retails and high net worth individuals in the United States.

• Accelerating business momentum driven by investments in high-growth areas like private markets, liquid alternatives, and specialized long-only strategies is expected to contribute to sustained organic growth and superior earnings performance.
  
• Increased investments and strategic focus on expanding into the U.S. wealth market through new product launches and partnerships, particularly in private markets and liquid alternatives, are likely to enhance access to a broader investor base and drive substantial inflows.
  
• A disciplined capital allocation strategy, with a significant emphasis on share repurchases at more than twice the historical pace, is expected to boost earnings per share (EPS) and improve shareholder returns amidst undervaluation.
  
• Robust growth in private markets assets under management (AUM), especially in sectors with long-term demand such as private credit and infrastructure, driven by a distinct competitive advantage and specialized thematic strategies, should bolster revenue and EBITDA margins.
  
• Strengthened strategic and operational capabilities, including product development and distribution in the wealth channel, coupled with concentrated efforts to forge new affiliate partnerships in areas of secular growth, are poised to scale business operations and positively impact future earnings growth.

Assumptions

• Analysts are assuming Affiliated Managers Group's revenue will grow by 1.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 31.5% today to 25.4% in 3 years time.
• Analysts expect earnings to reach $541.4 million (and earnings per share of $19.52) by about September 2027, down from $638.9 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 8.4x on those 2027 earnings, up from 7.6x 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 14.93% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.56%, as per the Simply Wall St company report.

Risks

• AMG's performance and future results could be affected negatively if the ongoing momentum in their private markets and liquid alternatives business does not continue as expected, potentially impacting revenue growth and EBITDA contribution.
  
• There could be risks associated with sustaining the organic growth reported in private markets fundraising and the long-term client demand trends in specialized thematic investment strategies, which may impact future net client cash inflows and AUM growth.
  
• Flattish flows in liquid alternatives, despite a favorable long-term outlook, suggest potential volatility in client demand and allocation, which could affect AUM growth and fee income in this segment.
  
• The firm's aggressive share repurchase activity, though reflective of confidence in its future prospects, might limit financial flexibility for unforeseen needs or investment opportunities, potentially affecting the balance sheet and cash reserves.
  
• Dependence on secular growth areas and thematic investment strategies brings exposure to market trends and investor sentiments, which could lead to variability in earnings if these sectors underperform or face adverse developments, impacting net margins and overall financial health.

Valuation

• The analysts have a consensus price target of $203.14 for Affiliated Managers Group 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 $226.0, and the most bearish reporting a price target of just $184.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.1 billion, earnings will come to $541.4 million, and it would be trading on a PE ratio of 8.4x, assuming you use a discount rate of 7.6%.
• Given the current share price of $163.9, the analyst's price target of $203.14 is 19.3% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.