Record Year Ahead As Private Credit And Global Expansion Propel Future Growth

Key Takeaways

• Strong fundraising momentum and private credit demand enhance Ares Management's potential for future revenue and margin growth.
  
• Global expansion and diversified strategies through acquisitions and new products are set to boost AUM, earnings, and operational efficiency.
  
• High distribution costs and competitive challenges in private credit markets could pressure Ares Management's margins, revenue growth, and earnings performance.

Catalysts

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

• Ares Management is seeing strong fundraising momentum and expects 2024 to be a record year, with over $64 billion raised year-to-date, which positions the company well for future revenue growth.
  
• The firm is observing heightened demand for private credit strategies, attributed to its differentiated experience and market-leading position, potentially boosting fee-related earnings and net margins.
  
• Ares is expanding its real asset presence globally through acquisitions, such as GCP International, which is expected to diversify its business mix and enhance growth, potentially impacting earnings positively.
  
• Record levels of available capital and an improving market are expected to broaden deployment strategies, likely leading to higher transaction volumes and contributing to future revenue increases.
  
• Expansion in the wealth channel and significant growth in segment AUM, particularly through new product launches like the tax-efficient core infrastructure fund, is expected to bolster future earnings and operating efficiencies.

Ares Management Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ares Management's revenue will grow by 24.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.7% today to 23.8% in 3 years time.
• Analysts expect earnings to reach $1.7 billion (and earnings per share of $9.28) by about November 2027, up from $432.3 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.9 billion in earnings, and the most bearish expecting $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 22.9x on those 2027 earnings, down from 78.2x today. This future PE is lower than the current PE for the US Capital Markets industry at 24.2x.
• Analysts expect the number of shares outstanding to decline by 16.64% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.3%, as per the Simply Wall St company report.

Ares Management Future Earnings Per Share Growth

Risks

• High distribution costs associated with wealth management products could pressure Ares' fee-related earnings margins, impacting net margins.
  
• A potential compression of credit spreads could lower returns in private credit, affecting fee-related performance revenues.
  
• The competitive landscape in private credit markets, with increasing capital concentration among large managers, might challenge Ares' ability to differentiate its offerings, impacting future revenue growth.
  
• A decline in short-term interest rates may impact Part 1 fees, with potential effects on overall earnings, despite expectations of transaction activity offsetting this.
  
• Potential macroeconomic risks, including shifts in transaction environments or infrastructure investment demand, could hinder Ares' deployment capabilities and realized income growth.

Valuation

• The analysts have a consensus price target of $172.31 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 $195.0, and the most bearish reporting a price target of just $150.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $7.1 billion, earnings will come to $1.7 billion, and it would be trading on a PE ratio of 22.9x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of $167.45, the analyst's price target of $172.31 is 2.8% higher. 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.