Tactical Growth And Diversified Earnings Promise A Bright Future For The Firm

Key Takeaways

• P10's focus on expanding through acquisitions and launching new funds underscores its strategy for growth and revenue diversification.
  
• Emphasis on client relationships, product development, and operational improvements aims to boost market penetration and shareholder value.
  
• Aggressive M&A strategy and dependence on variable revenue sources like catch-up fees introduce risks to earnings stability and growth prospects.

Catalysts

Operates as a multi-asset class private market solutions provider in the alternative asset management industry in the United States.

• P10 has demonstrated momentum in fundraising, closing new funds above target sizes and expecting to launch additional funds, impacting future revenue through increased fee-paying assets under management.
  
• The company's strategic transaction announcement, expected within the calendar year, alongside the increase in borrowing capacity, suggests potential for growth through acquisitions, likely impacting revenue and diversifying earnings streams.
  
• The appointment of a new Executive Vice President and Global Head of Client Solutions highlights a focus on expanding client relationships and developing new products, which could lead to increased revenue from broader and deeper market penetration.
  
• Continuous capital deployment in new and existing commingled funds enhances the firm’s ability to capitalize on investing opportunities, potentially increasing earnings through management fees and performance incentives.
  
• P10's operational improvements and strategic initiatives, including share repurchase programs and disciplined approach to inorganic growth, indicate a management strategy focused on shareholder value and earnings per share enhancement.

Assumptions

• Analysts are assuming P10's revenue will grow by 6.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.0% today to 21.9% in 3 years time.
• Analysts expect earnings to reach $69.5 million (and earnings per share of $0.6) by about September 2027, up from $2.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.2x on those 2027 earnings, down from 480.8x today. This future PE is lower than the current PE for the US Capital Markets industry at 21.6x.
• Analysts expect the number of shares outstanding to decline by 3.9% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.07%, as per the Simply Wall St company report.

Risks

• Growth in fee-paying assets under management (AUM) is partially offset by significant step-downs and expirations, which could lead to volatility in future revenue streams.
  
• The decrease in fee-related earnings (FRE) year-over-year, despite an increase in revenue, suggests pressures on profit margins that could affect net income.
  
• Dependency on successful fundraising and the closing of new funds for revenue growth introduces execution risk that could impact both revenue and earnings if growth targets are not met.
  
• The mention of potential strategic transactions and increased borrowing capacity signals an aggressive growth and M&A strategy that could carry integration and debt service risks, affecting earnings and cash flow.
  
• The reliance on catch-up fees as a significant revenue source, which is not constant and may fluctuate, adds an element of unpredictability to future earnings.

Valuation

• The analysts have a consensus price target of $11.0 for P10 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 $13.0, and the most bearish reporting a price target of just $9.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $316.5 million, earnings will come to $69.5 million, and it would be trading on a PE ratio of 19.2x, assuming you use a discount rate of 7.1%.
• Given the current share price of $10.82, the analyst's price target of $11.0 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.