Expanding Into Fixed Income And Alternatives Unlocks Growth Potential And Institutional Appeal

Key Takeaways

• Artisan Partners is diversifying into fixed income and alternatives, meeting institutional demand, and aiming to drive revenue growth and scalability.
  
• New strategies and performance fees are expected to enhance earnings by attracting institutional investors and tapping into global wealth markets.
  
• Fluctuating client cash outflows, competition for alpha, and market volatility could challenge earnings stability and future revenue growth.

Catalysts

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

• Artisan Partners has expanded into fixed income and alternatives, generating positive alpha. This strategy is expected to meet institutional demand, driving future revenue growth.
  
• New investment teams, particularly those focusing on high yield, long-short credit, and emerging markets, offer significant scalability and are expected to capture large inflows as they mature, potentially boosting revenue.
  
• The International Small-Mid team and EMsights Capital Group are focusing on niche markets, which could provide growth through the generation of high returns for clients, possibly increasing earnings.
  
• Expanding into the global wealth market and increasing degrees of freedom for their strategies could open new opportunities for higher margin products, potentially improving net margins.
  
• Performance fees from new strategies offer an additional revenue source. As these strategies reach critical milestones, such as the 3-year track record, they are likely to attract more institutional investors, enhancing future earnings.

Artisan Partners Asset Management Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Artisan Partners Asset Management's revenue will grow by 9.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 21.9% today to 21.1% in 3 years time.
• Analysts expect earnings to reach $294.7 million (and earnings per share of $3.78) by about November 2027, up from $232.7 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 14.1x on those 2027 earnings, up from 14.0x today. This future PE is lower than the current PE for the US Capital Markets industry at 23.6x.
• Analysts expect the number of shares outstanding to decline by 0.99% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.9%, as per the Simply Wall St company report.

Artisan Partners Asset Management Future Earnings Per Share Growth

Risks

• Artisan Partners' focus on long-term investments, including new talent and strategies, impacts operating cash flow and can strain margins and the ability to distribute cash to partners and shareholders. This could negatively affect net margins.
  
• Despite successful fixed income and alternative strategies, the firm acknowledges a lot more work to do, implying ongoing uncertainty and potential risks in execution, which could influence earnings stability.
  
• Net client cash outflows of $750 million in the third quarter highlight the risk of fluctuating asset mixes and client departures, potentially impacting future revenue growth.
  
• Shrinking public equity opportunity sets and increasing competition for alpha could make generating attractive financial outcomes more difficult, potentially affecting revenue and net margins.
  
• Exposure to market volatility and reliance on performance fees can lead to income variability, impacting the predictability and stability of earnings and financial performance.

Valuation

• The analysts have a consensus price target of $44.25 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 $40.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.4 billion, earnings will come to $294.7 million, and it would be trading on a PE ratio of 14.1x, assuming you use a discount rate of 6.9%.
• Given the current share price of $46.43, the analyst's price target of $44.25 is 4.9% 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.