NorthBridge Investment And Alternatives Expansion Will Stabilize Future Cash Flows

Key Takeaways

• Increasing exposure to alternatives and private markets is expected to enhance long-term growth and stabilize cash flows, boosting revenue and earnings.
  
• Strategic investments and partnerships in the wealth channel are driving asset growth and fee-related earnings, with share repurchases enhancing earnings per share.
  
• Ongoing net client cash outflows, reduced EBITDA, and reliance on strategic investments could strain earnings growth and capital flexibility amid market headwinds.

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.

• AMG is increasing its exposure to alternatives, particularly in private markets and liquid alternatives. This strategic shift is expected to enhance long-term growth prospects and stabilize cash flows, potentially leading to increased revenue and earnings.
  
• The company's recent investment in NorthBridge Partners, specializing in industrial logistics real estate, taps into high-growth areas driven by digital economy expansion and evolving supply chain dynamics. This investment is expected to contribute to future revenue growth.
  
• AMG's partnerships and new product developments, especially in the U.S. wealth channel, are driving growth in assets under management (AUM) and are likely to boost fee-related earnings over time.
  
• The company's strategic investments in the wealth channel have resulted in significant growth of alternatives AUM. With a strong pipeline of new investment opportunities and continued product innovation, AMG is poised to further increase revenue and earnings.
  
• AMG's disciplined capital allocation strategy, including significant share repurchases, is enhancing earnings per share (EPS). The company plans to continue share repurchases, which can positively impact EPS growth.

Affiliated Managers Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Affiliated Managers Group's revenue will decrease by 0.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 25.1% today to 29.6% in 3 years time.
• Analysts expect earnings to reach $621.3 million (and earnings per share of $22.78) by about April 2028, up from $511.6 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 8.9x on those 2028 earnings, up from 8.8x today. This future PE is lower than the current PE for the US Capital Markets industry at 24.2x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.44%, as per the Simply Wall St company report.

Affiliated Managers Group Future Earnings Per Share Growth

Risks

• Ongoing net client cash outflows of $8 billion, primarily due to industry headwinds in equities, could continue to negatively impact revenue and earnings growth despite strengths in alternatives.
  
• The reduction in adjusted EBITDA by 5% year-over-year, partially due to lower net performance fees, signals potential challenges in maintaining previous profit levels, impacting margins and earnings.
  
• Projections for lower first quarter adjusted EBITDA and performance fees compared to 2023 may suggest decreasing short-term earnings potential.
  
• There are risks associated with the ongoing high level of share repurchases, which, while contributing to past EPS growth, could limit future capital flexibility for other growth investments if earnings or cash flows do not meet expectations.
  
• Dependence on the success of strategic investments and partnerships, such as the recent minority investment in NorthBridge Partners, involves execution risk and market acceptance risk, which could impact future revenue generation and diversification efforts.

Valuation

• The analysts have a consensus price target of $188.143 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 $200.0, and the most bearish reporting a price target of just $168.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.1 billion, earnings will come to $621.3 million, and it would be trading on a PE ratio of 8.9x, assuming you use a discount rate of 8.4%.
• Given the current share price of $155.6, the analyst price target of $188.14 is 17.3% 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.