Launch Of New Active ETFs And Investment Trusts Will Strengthen Global Market Presence

Key Takeaways

• Strategic expansion in ETFs and investment trusts boosts growth in domestic and international markets, increasing potential revenue.
  
• Strong alternative/private market performance and fixed income asset growth indicate prospects for increased asset management revenue.
  
• Competitive pressures, regulatory constraints, and FX risks threaten revenue growth and stability despite positive net sales in equity and fixed income.

Catalysts

A publicly owned investment manager.

• The strategic expansion of MDT strategies, including the launch of new active ETFs and investment trusts, is expected to strengthen growth opportunities in both domestic and international markets, potentially increasing revenue.
  
• Record high fixed income assets and improved net sales performance, driven by institutional strategies and major funds, suggest potential growth in earnings as these segments continue to attract investors.
  
• The strong performance and expansion in alternative/private markets category, including new private equity and direct lending funds, indicate prospects for increased asset management revenue in the future.
  
• With positive market conditions expected for money market strategies and attractive money market fund yields, a sustained growth in money market assets could lead to higher revenue streams.
  
• Continued share repurchase program activity demonstrates commitment to returning value to shareholders and could lead to improved earnings per share (EPS).

Federated Hermes Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Federated Hermes's revenue will grow by 5.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.9% today to 20.4% in 3 years time.
• Analysts expect earnings to reach $383.7 million (and earnings per share of $5.11) by about December 2027, up from $254.2 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $343.2 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.2x on those 2027 earnings, down from 12.9x today. This future PE is lower than the current PE for the US Capital Markets industry at 23.4x.
• Analysts expect the number of shares outstanding to decline by 1.26% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.11%, as per the Simply Wall St company report.

Federated Hermes Future Earnings Per Share Growth

Risks

• Net redemptions in equity funds and SMAs, along with known redemptions expected in Q4, could affect revenue and profit margins.
  
• Continued positive net sales in equity and fixed income could be offset by a significant FHI money market share decline, impacting revenue growth.
  
• Money market fund share losses, even amidst rate cuts, indicate possible competitive threats, potentially reducing future revenue and profit margins.
  
• Regulatory changes and high daily cash requirements could constrain money market fund operations, affecting revenue stability.
  
• Currency fluctuations, particularly with the pound versus the dollar, pose risks to earnings due to FX-related expenses.

Valuation

• The analysts have a consensus price target of $42.62 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 $49.0, 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 2027, revenues will be $1.9 billion, earnings will come to $383.7 million, and it would be trading on a PE ratio of 10.2x, assuming you use a discount rate of 7.1%.
• Given the current share price of $41.95, the analyst's price target of $42.62 is 1.6% 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.