Alternative Investments And Tech Partnerships Propel Company Towards A Brighter Future

Key Takeaways

• Expansion into alternative investments and strategic technology investments, including AI, are poised to enhance Franklin Resources' revenues and operational efficiencies.
  
• Diversification through ETFs, global joint ventures, and emphasis on digital assets underscore efforts to grow market share and adapt to dynamic financial landscapes.
  
• Franklin Resources' aggressive strategy in technology and market expansion introduces significant financial and operational risks, potentially impacting profitability and long-term success.

Catalysts

A publicly owned asset management holding company.

• Expansion into alternative investments appears as a key catalyst for Franklin Resources, likely to increase revenues through higher fee rates associated with these products, as evidenced by the $12 billion raised fiscal year-to-date in alternatives.
  
• Strategic technology investments, such as the collaboration with Microsoft on an AI platform and the integration of Aladdin, aim to enhance operational efficiencies. These initiatives are likely to improve net margins by reducing long-term capital expenditures and operational costs, with savings starting around fiscal 2028.
  
• The diversification and growth of the ETF business, with assets under management (AUM) at $27 billion across various strategies, indicate an emphasis on capturing more market share. This expansion is set to impact revenues positively, leveraging global demand for ETFs and digital assets.
  
• Positive trends in fixed income and multi-sector credit strategies, along with a strategic focus on vehicle diversification (e.g., cross-border funds, ETFs, SMAs), are expected to stabilize and grow revenue by attracting inflows in a dynamic interest rate environment.
  
• Ongoing efforts to broaden investment capabilities and global presence, as reflected by the joint venture in Japan with SBI Holdings and the growth of the private wealth management business, outline Franklin Resources' forward-looking approach to tapping into new markets and demographics, with potential positive impacts on both revenue and earnings growth.

Assumptions

• Analysts are assuming Franklin Resources's revenue will decrease by -1.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.8% today to 14.1% in 3 years time.
• Analysts expect earnings to reach $1.1 billion (and earnings per share of $2.2) by about October 2027, up from $810.2 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.4 billion in earnings, and the most bearish expecting $695.0 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.6x on those 2027 earnings, down from 13.4x today. This future PE is lower than the current PE for the US Capital Markets industry at 23.2x.
• Analysts expect the number of shares outstanding to decline by 0.53% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.35%, as per the Simply Wall St company report.

Risks

• The reliance on external partnerships for technological advancements and product launches, such as with Microsoft and SBI Holdings, introduces risk if these collaborations do not meet strategic or operational targets, potentially impacting revenue and profit margins.
  
• The ambitious investments in AI and blockchain technologies, while forward-looking, could strain operational budgets and distract from core business areas if these ventures fail to generate expected returns, thereby affecting long-term profitability.
  
• The firm's strategy to absorb costs associated with implementing the Aladdin platform might not be as effective as planned, leading to potential unexpected expenses impacting net margins.
  
• Franklin Resources' expansion into alternatives and private markets, although potentially lucrative, carries high execution risk in terms of both attracting capital and managing complex investments, which could affect revenue and earnings if these initiatives underperform.
  
• Global distribution and focus on vehicle diversification expose the company to regulatory, market, and operational risks across different regions, which could lead to increased operational costs or fines, ultimately impacting net income.

Valuation

• The analysts have a consensus price target of $20.59 for Franklin Resources 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 $24.0, and the most bearish reporting a price target of just $19.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $8.0 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 11.6x, assuming you use a discount rate of 7.3%.
• Given the current share price of $20.83, the analyst's price target of $20.59 is 1.2% 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.