Asset Management And Private Wealth Will Drive Future Momentum

Key Takeaways

• Continued diversification in asset management and private wealth signals potential revenue growth by expanding client bases and launching new credit products.
  
• Strategic investments in lower-risk ventures and full ownership of Global Atlantic are expected to enhance earnings and net profit margins.
  
• KKR's growth faces uncertainty due to market volatility, geopolitical tensions, and competitive pressures in key segments like asset management and private credit.

Catalysts

A private equity and real estate investment firm specializing in direct and fund of fund investments.

• KKR's strong performance in asset management and anticipated momentum in private wealth, including the recent launch of hybrid credit products, indicate potential for increased revenues through diversifying and expanding client bases.
  
• The growth in fee-related earnings, which have shown significant annual increases, paired with a pipeline for further management fee growth, is expected to continue contributing positively to KKR's earnings moving forward.
  
• Strategic Holdings' expansion with additional investments in businesses presenting lower cyclical risk and strong cash generation potential is likely to drive future earnings growth, enhancing overall financial resilience.
  
• The integration and 100% ownership of Global Atlantic, alongside a shift towards longer-duration, private market assets, suggest increased earnings potential from insurance operations, positively impacting KKR’s net profit margins.
  
• KKR's active investment environment and the anticipated increase in monetizations, driven by improved M&A conditions, suggest future revenue growth through increased transaction activities across its portfolio.

KKR Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on KKR compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming KKR's revenue will decrease by 23.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 11.6% today to 47.2% in 3 years time.
• The bearish analysts expect earnings to reach $5.5 billion (and earnings per share of $5.38) by about April 2028, up from $3.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 24.1x on those 2028 earnings, down from 30.8x today. This future PE is greater than the current PE for the US Capital Markets industry at 23.1x.
• Analysts expect the number of shares outstanding to grow by 0.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.34%, as per the Simply Wall St company report.

KKR Future Earnings Per Share Growth

Risks

• KKR's reliance on market conditions to improve for continued financial growth introduces uncertainty; adverse changes in the macro environment or geopolitical tensions could negatively affect future revenues and earnings.
  
• KKR's profitability is subject to volatility in its Asset Management segment, driven largely by private equity and infrastructure segment performance; any downturn in these areas could lead to decreased earnings.
  
• Competitive pressure in the private credit and infrastructure markets could compress margins, impacting net margins negatively if KKR cannot sustain its current edge.
  
• Rising interest rates and market volatility may affect transaction volumes and investment performance, potentially suppressing realized investment income and net income.
  
• Execution risk related to growth through strategic holdings and various new product lines could impact strategic goals, possibly straining revenue growth and earnings if these strategies do not yield the expected returns.

Valuation

• The assumed bearish price target for KKR is $118.01, which represents one standard deviation below the consensus price target of $135.52. This valuation is based on what can be assumed as the expectations of KKR's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $194.0, and the most bearish reporting a price target of just $114.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $11.7 billion, earnings will come to $5.5 billion, and it would be trading on a PE ratio of 24.1x, assuming you use a discount rate of 8.3%.
• Given the current share price of $106.81, the bearish analyst price target of $118.01 is 9.5% 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.