Innovative Investments And Digital Expansion Drive Exceptional Growth Potential

Key Takeaways

• Expansion into digital infrastructure and renewable energy sectors indicates a strong positioning for future growth and earnings diversification.
  
• Record fundraising and significant investments in Q2 highlight robust demand for Ares' products and strong execution capability, suggesting potential earnings growth.
  
• Ares Management's strategic focus on due diligence and selective investment in competitive markets may slow deal closures, impacting revenue and diversification efforts.

Catalysts

Operates as an alternative asset manager in the United States, Europe, and Asia.

• The significant increase in deployments, with $26 billion invested in Q2, signals strong execution capability and growth potential, likely impacting future revenue positively.
  
• Record fundraising of $26 billion in gross capital raised in Q2 demonstrates robust demand for Ares' investment products, suggesting potential for increased management fees and earnings growth.
  
• Expansion into digital infrastructure and renewable energy sectors, with substantial commitments over the past five years, positions Ares well to capitalize on future growth trends, potentially enhancing revenue and diversification of earnings sources.
  
• The launch of new products targeting specific opportunities, like the Specialty Healthcare Fund, showcases Ares' ability to innovate and tap into niche markets, indicating potential for revenue growth and market share expansion.
  
• Strong momentum in wealth management through significant new equity commitments and leverage, points towards Ares' ability to penetrate deeper into high-growth markets, likely enhancing fee-related earnings and diversifying revenue streams.

Assumptions

• Analysts are assuming Ares Management's revenue will grow by 28.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.7% today to 24.1% in 3 years time.
• Analysts expect earnings to reach $1.6 billion (and earnings per share of $7.31) by about September 2027, up from $378.2 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $1.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 38.4x on those 2027 earnings, down from 82.8x today. This future PE is greater than the current PE for the US Capital Markets industry at 21.6x.
• Analysts expect the number of shares outstanding to grow by 2.78% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.13%, as per the Simply Wall St company report.

Risks

• The intense focus on rigorous fundamental due diligence and tight documentation structures in more competitive markets may challenge Ares Management’s ability to quickly close deals, potentially impacting deployment rates and associated revenue growth.
  
• A shift towards more selective investment criteria, especially in competitive markets, could limit Ares Management's ability to maintain its historical deployment pace, potentially affecting fee-related earnings growth.
  
• The reliance on non-sponsor direct lending for diversification, which currently represents a small percentage of origination, may not significantly impact overall deployment levels in the near term, potentially affecting revenue diversification efforts.
  
• The potential overreaction of markets to macroeconomic indicators and subsequent shifts in investment sentiment could lead to increased market volatility, impacting the predictability and stability of investment returns and possibly affecting net asset values and incentive fees.
  
• The strategy to diversify distribution channels, including efforts in retail and wealth management, while beneficial, requires significant investment and time to yield results. This long-term growth initiative may not immediately counterbalance short-term market or economic downturns, potentially affecting short-term earnings growth expectations.

Valuation

• The analysts have a consensus price target of $150.23 for Ares 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 $177.0, and the most bearish reporting a price target of just $133.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $6.8 billion, earnings will come to $1.6 billion, and it would be trading on a PE ratio of 38.4x, assuming you use a discount rate of 7.1%.
• Given the current share price of $156.91, the analyst's price target of $150.23 is 4.4% 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.