MDT Quant Strategies And Rivington Energy Will Unlock Opportunities

Key Takeaways

• Strong growth in MDT quant strategies and institutional mandates suggests continued revenue and future earnings potential.
  
• Acquisition and private markets initiatives enhance renewable energy expertise and focus on alternative assets, driving strategic revenue growth and shareholder value.
  
• Despite record assets, Federated Hermes faces revenue pressure from competitive dynamics, fixed income outflows, integration risks, and FX volatility impacting earnings.

Catalysts

A publicly owned investment manager.

• Federated Hermes is seeing strong sales growth in its MDT quant strategies, particularly from institutional investors, with ongoing sales momentum and net wins yet to fund, which suggests potential for continued revenue growth.
  
• The firm expects significant net additions from institutional mandates in its long-term investment platform across equities, private markets, and fixed income, which could positively impact future earnings.
  
• Federated Hermes' acquisition of Rivington Energy enhances its private markets platform, adding expertise in the renewable energy sector that could increase future fundraising opportunities and drive revenue growth.
  
• Private markets initiatives, including ongoing fundraising for European Direct Lending and private equity innovation funds, indicate a growing focus on alternative asset classes likely to contribute to earnings expansion.
  
• Federated Hermes is actively using capital by increasing dividends, share buybacks, and strategic acquisitions, which can enhance shareholder value and improve earnings per share.

Federated Hermes Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Federated Hermes's revenue will grow by 4.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 17.0% today to 19.7% in 3 years time.
• Analysts expect earnings to reach $374.8 million (and earnings per share of $4.81) by about April 2028, up from $281.7 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 8.4x on those 2028 earnings, down from 10.8x today. This future PE is lower than the current PE for the US Capital Markets industry at 24.5x.
• Analysts expect the number of shares outstanding to decline by 5.99% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.45%, as per the Simply Wall St company report.

Federated Hermes Future Earnings Per Share Growth

Risks

• Despite record assets under management in Q1, including a significant increase in money market assets, there was a noted decrease in market share for money market mutual funds, suggesting potential revenue pressure from competitive dynamics.
  
• Although Federated Hermes reported strong equity net sales, particularly in MDT strategies, there were net redemptions in fixed income funds, notably in the Total Return Bond Fund and High Yield sectors, which could negatively impact revenue and overall asset growth.
  
• The company is experiencing elevated fixed income outflows in early Q2, attributed to performance issues, particularly in Total Return Bond Fund, which may continue if performance does not improve, affecting net margins.
  
• While Federated Hermes is making strategic acquisitions, such as the purchase of a majority interest in Rivington Energy, the integration risks and potential misalignment with core competencies could affect long-term earnings and operational efficiency.
  
• The ongoing FX volatility, as seen with substantial FX-related expense fluctuations in Q1, could continue to impact operating expenses and net earnings unpredictably, given their international operations and exposure to currency risks.

Valuation

• The analysts have a consensus price target of $40.857 for Federated Hermes 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 $46.0, and the most bearish reporting a price target of just $37.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.9 billion, earnings will come to $374.8 million, and it would be trading on a PE ratio of 8.4x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of $40.41, the analyst price target of $40.86 is 1.1% 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.