Diversifying Into Emerging Markets And Alternatives Poised To Boost Sophisticated Investor Appeal And Revenue Growth

Key Takeaways

• Expansion into alternatives and private assets, along with entry into emerging market debt, suggests a strategic diversification aimed at attracting sophisticated investors and increasing AUM.
  
• Focusing on high value-added investing and enhancing distribution capabilities emphasizes the firm's commitment to generating alpha and capturing growing demand for alternative products, potentially improving revenue and net margins.
  
• Expanding into alternative and emerging markets amid competitive pressures and client concentration risks could significantly affect revenue and net margins.

Catalysts

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

• Expansion into alternatives and private assets indicates a plan for diversification that might attract a broader range of sophisticated investors, impacting revenue growth due to high fee structures typical in alternative investments.
  
• Focusing on high value-added investing emphasizes the firm's commitment to generating alpha, which could lead to enhanced reputation and larger inflows, positively affecting net margins through economies of scale.
  
• Entry into emerging market debt, a sector with historically attractive returns and fragmentation, offers a growth opportunity that could lead to increased AUM and consequently, higher revenue.
  
• Incremental investments in alternative investments and distribution capabilities suggest a strategic move to capture more of the growing demand for alternative products, potentially impacting revenue and earnings positively through access to higher-margin business.
  
• Launch of strategies in less liquid and more alternative spaces, combined with a focus on talent and performance right in areas of long-term demand, suggests potential for differentiation and premium fees, impacting revenue and net margins positively.

Assumptions

• Analysts are assuming Artisan Partners Asset Management's revenue will grow by 10.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 20.8% today to 21.3% in 3 years time.
• Analysts expect earnings to reach $300.0 million (and earnings per share of $3.87) by about October 2027, up from $214.5 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 13.3x on those 2027 earnings, down from 14.6x today. This future PE is lower than the current PE for the US Capital Markets industry at 22.0x.
• Analysts expect the number of shares outstanding to decline by 1.19% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.7%, as per the Simply Wall St company report.

Risks

• Concerns about the reliance on achieving significant growth in alternative and emerging market strategies, which could be volatile and subject to unexpected market shifts, impacting revenue and AUM growth.
  
• Potential challenges in sustaining high fee rates in a competitive environment, especially as the firm expands further into alternatives and emerging markets, which could pressure net margins.
  
• Risks associated with client concentration and the dependence on large institutional mandates for growth, which could lead to significant AUM and revenue volatility if key clients withdraw.
  
• The impact of market conditions on emerging markets and alternative assets, which might not perform as expected, potentially affecting earnings through lower-than-expected asset growth or higher redemptions.
  
• Operational and financial risks related to the expansion into new investment strategies and markets, including the necessity for increased investment in talent and distribution capabilities, which could impact operating expenses and reduce net income if revenues do not increase as expected.

Valuation

• The analysts have a consensus price target of $42.69 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 $50.0, and the most bearish reporting a price target of just $39.75.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.4 billion, earnings will come to $300.0 million, and it would be trading on a PE ratio of 13.3x, assuming you use a discount rate of 6.7%.
• Given the current share price of $44.74, the analyst's price target of $42.69 is 4.8% 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.