Leadership Appointments And Global Expansion Will Unlock Future Markets

Key Takeaways

• Expanded executive leadership and strategic initiatives are expected to enhance resource allocation, driving growth and potentially boosting revenue and margins.
  
• Global expansion and diversification into underserved markets aim to increase AUM and management fees, supporting sustained revenue growth.
  
• The integration of recent acquisitions and reliance on fundraising momentum could strain revenue, especially amid economic shifts and rising expenses.

Catalysts

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

• Ares Management is poised to benefit from enhancements to its executive management team, where the appointment of co-presidents is expected to drive strategic and operational initiatives effectively. This leadership expansion could lead to better resource allocation and strategic growth, potentially enhancing revenue and net margins through increased efficiencies.
  
• The company's global expansion strategy, underpinned by the addition of over 100 investment professionals in the past year, aims to address significantly underserved markets in private assets. This strategy is likely to boost assets under management (AUM) and management fees as they capitalize on a growing demand for alternative investments, driving revenue growth.
  
• The acquisition of GCP International and the planned launch of several new funds across Japan, the U.S., and Europe, are expected to expand Ares Management's capabilities in the real assets and infrastructure sectors. This expansion should support higher AUM and fee-related earnings, contributing to overall earnings growth.
  
• Ares Management is leveraging increasing retail and institutional investor allocations to alternative assets, with 65% of their 2024 fundraising coming from outside their campaign funds. The broadening of their capital base and increasing fundraising capabilities should enhance management fees and enable sustained revenue growth.
  
• The substantial dry powder reserve of $133 billion positions Ares to capitalize on improving transaction environments and pent-up demand for private equity exits, enhancing net investment activity and revenue streams. This deployment potential is expected to drive fee-related earnings and realized income, translating into improved earnings forecasts.

Ares Management Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Ares Management compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Ares Management's revenue will grow by 26.0% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 10.6% today to 25.5% in 3 years time.
• The bullish analysts expect earnings to reach $2.0 billion (and earnings per share of $7.75) by about April 2028, up from $410.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 47.5x on those 2028 earnings, down from 81.4x today. This future PE is greater than the current PE for the US Capital Markets industry at 24.5x.
• Analysts expect the number of shares outstanding to grow by 6.63% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.71%, as per the Simply Wall St company report.

Ares Management Future Earnings Per Share Growth

Risks

• A shift in the economic environment could negatively affect deployment activities despite a current optimistic outlook, potentially resulting in slowed revenue growth.
  
• There is significant reliance on continued fundraising momentum, particularly outside of campaign funds, which could strain future revenue flows if disrupted.
  
• The integration of recent acquisitions like GCP International may pose operational challenges and could impact net earnings if expected synergies and growth are not realized within projected timelines.
  
• Real estate market recovery, which is crucial for certain revenue streams, is contingent on favorable market conditions and could impact expected management fee growth if the market falters.
  
• Rising supplemental distribution expenses associated with the expansion into wealth management products may drag on net margins, especially if fundraising does not keep pace with the anticipated expense growth.

Valuation

• The assumed bullish price target for Ares Management is $190.39, which represents two standard deviations above the consensus price target of $157.0. This valuation is based on what can be assumed as the expectations of Ares Management's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $201.0, and the most bearish reporting a price target of just $125.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $7.8 billion, earnings will come to $2.0 billion, and it would be trading on a PE ratio of 47.5x, assuming you use a discount rate of 7.7%.
• Given the current share price of $152.79, the bullish analyst price target of $190.39 is 19.8% 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.