Expanding Investment Strategies Will Squeeze Net Margins

Key Takeaways

• Expansion into more investment teams and strategies may strain resources and increase operational costs, impacting net margins.
  
• New launches and a focus on private wealth markets could compress margins, despite potential revenue growth, due to higher marketing and operational complexity.
  
• Strategic expansion in investment teams, successful asset class growth, and focus on intermediated wealth channel could drive revenue and profitability in varying market conditions.

Catalysts

Artisan Partners Asset Management Inc. is publicly owned investment manager.

• The expansion from 5 investment teams to 11 and from 12 to 27 investment strategies, including the shift from long-only public equity to multi-asset class platforms, may stretch resources and increase operational costs, impacting net margins.
  
• The focus on the private wealth market and evolving distribution structures suggest increased spending on marketing and sales enablement capabilities, which could compress net margins despite potential revenue growth from new client channels.
  
• New strategy launches, such as the Artisan Global Special Situation and Franchise strategies, increase operational complexity and risk, potentially affecting earnings as returns on new investments may not meet expectations in the short term.
  
• Reliance on the intermediated wealth channel, which involves higher marketing and distribution costs, may pressure net margins even as it contributes to revenue growth.
  
• The shift towards strategies with high degrees of freedom in volatile markets may not always result in consistent outperformance, leading to potential volatility in revenue and earnings.

Artisan Partners Asset Management Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Artisan Partners Asset Management's revenue will grow by 8.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 21.7% today to 21.2% in 3 years time.
• Analysts expect earnings to reach $303.7 million (and earnings per share of $3.6) by about August 2028, up from $247.0 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 15.6x on those 2028 earnings, up from 13.2x today. This future PE is lower than the current PE for the US Capital Markets industry at 26.8x.
• Analysts expect the number of shares outstanding to grow by 0.81% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.18%, as per the Simply Wall St company report.

Artisan Partners Asset Management Future Earnings Per Share Growth

Risks

• Artisan Partners Asset Management has expanded its investment teams and strategies significantly since 2013, allowing it to adapt to varying market conditions and potentially increase revenue and earnings by capturing more asset flows.
  
• The firm has shown a strong track record of outperformance, as demonstrated by the Artisan Global Value strategy. Long-term investment success is likely to attract more clients, thereby potentially increasing assets under management and revenue.
  
• The firm is focusing on the intermediated wealth channel, which has been growing and represents a majority of their assets under management. Growth in this channel can lead to increased revenue and profitability for Artisan Partners.
  
• Artisan Partners has been successful in fixed income and alternative asset classes, areas of strategic growth focus. Expansion in these asset classes, particularly in a volatile economic environment, can attract more investments, thereby enhancing revenue growth.
  
• By having a strong liquidity position and maintaining a disciplined approach towards expenses, including variable expenses adjusting with revenues, Artisan Partners is well-positioned to sustain profitability and protect or improve net margins.

Valuation

• The analysts have a consensus price target of $45.625 for Artisan Partners Asset Management 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 $51.0, and the most bearish reporting a price target of just $41.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.4 billion, earnings will come to $303.7 million, and it would be trading on a PE ratio of 15.6x, assuming you use a discount rate of 8.2%.
• Given the current share price of $46.26, the analyst price target of $45.62 is 1.4% lower. 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.