Infrastructure & Asia Expansion Propel Earnings Amid Dynamic Fundraising Super Cycle

Key Takeaways

• Strong fundraising and strategic focus on mega themes signal significant potential for revenue and earnings growth.
  
• Insurance segment and monetization strategy promise enhanced margins and profitability driven by recurring and investment earnings.
  
• Geopolitical risks, rising expenses, and competitive pressures threaten KKR's profitability, with uncertainty in asset earnings and strategic deployment posing additional growth risks.

Catalysts

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

• KKR's strong fundraising activities, including raising $87 billion of new capital year-to-date and indicating they are at the early stages of a fundraising super cycle, suggest potential for significant revenue growth.
  
• The strategic focus on infrastructure, credit, and Asia regions as mega themes driving global growth provides KKR with a robust platform for future expansion, which is likely to have a positive impact on earnings.
  
• The insurance segment's operating earnings are projected to increase materially with a targeted $300-plus million of net dividends by 2026 and $600-plus million by 2028, potentially enhancing net margins due to this recurring revenue stream.
  
• KKR's proactive monetization strategy, supported by improving market conditions such as increased M&A volumes and IPOs, is expected to drive future investment earnings and overall profitability.
  
• The strategic partnership with Global Atlantic and the enhancement of capital markets capabilities is poised to deliver incremental revenues and robust FRE margins, contributing to higher overall net income.

KKR Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming KKR's revenue will decrease by -35.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.8% today to 67.4% in 3 years time.
• Analysts expect earnings to reach $5.0 billion (and earnings per share of $7.99) by about November 2027, up from $3.0 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $6.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.6x on those 2027 earnings, down from 45.2x today. This future PE is greater than the current PE for the US Capital Markets industry at 24.2x.
• Analysts expect the number of shares outstanding to decline by 10.76% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.53%, as per the Simply Wall St company report.

KKR Future Earnings Per Share Growth

Risks

• Economic conditions and geopolitical risks, such as potential tariffs or trade wars, could impact KKR's portfolio companies, thereby affecting revenue and profitability.
  
• Increasing operating expenses, including placement fees as fundraising activities ramp up, may put pressure on net margins and overall profitability.
  
• Competition in the high-demand asset categories like infrastructure and credit could lead to pricing pressures, potentially impacting net earnings.
  
• Unrealized carried interest and earnings from Strategic Holdings face uncertainty, as results may not be linear and rely heavily on market conditions, affecting future profitability.
  
• Dependence on successful deployment and monetization activities to maintain growth poses a risk, as any slowdown could negatively impact revenue and earnings.

Valuation

• The analysts have a consensus price target of $157.81 for KKR 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 $184.0, and the most bearish reporting a price target of just $102.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $7.5 billion, earnings will come to $5.0 billion, and it would be trading on a PE ratio of 24.6x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of $152.13, the analyst's price target of $157.81 is 3.6% 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.