Strategic Growth In Wealth And Asset Management Boosts Earnings And Diversifies Income Streams

Key Takeaways

• Expansion into in-plan annuities and strategic alliances like with BlackRock LifePath Paycheck aims to diversify income sources and access new markets.
  
• Focus on high-growth areas such as Wealth Management and Private Markets businesses signifies a strategic move to enhance AUM growth and net revenue margins.
  
• Diverse challenges across segments, including rising competition, dependency on certain products, capital strain, volatility in mortality results, and execution risks could impact profitability and growth.

Catalysts

Together with its consolidated subsidiaries, operates as a diversified financial services company worldwide.

• Robust growth in Retirement, Asset Management, and Wealth Management divisions, driven by demand for industry-leading RILA products and advisory services, likely to increase revenues and Asset Under Management (AUM).
  
• Strategic capital allocation with a focus on returning $325 million to shareholders, maintaining a payout ratio within the target range, supports earnings per share (EPS) growth through share repurchases.
  
• Expansion into in-plan annuities, notably the BlackRock LifePath Paycheck collaboration, positions Equitable to access new markets and customer segments, potentially boosting future revenue streams and diversifying income sources.
  
• AllianceBernstein's improved operating margin and shift towards higher-margin retail and private market segments are expected to enhance overall profitability and contribute positively to Equitable's revenue and net income.
  
• Investments in Wealth Management and Private Markets businesses, with an aim to increase earnings significantly by 2027, indicate a focus on high-growth areas that can drive AUM growth and improve net revenue margins.

Assumptions

• Analysts are assuming Equitable Holdings's revenue will grow by 15.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.2% today to 12.5% in 3 years time.
• Analysts expect earnings to reach $2.2 billion (and earnings per share of $7.98) by about September 2027, up from $828.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $2.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 6.4x on those 2027 earnings, down from 16.1x today. This future PE is lower than the current PE for the US Diversified Financial industry at 16.0x.
• Analysts expect the number of shares outstanding to decline by 8.76% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.41%, as per the Simply Wall St company report.

Risks

• Rising competition in the RILA market could pressure product sales and affect revenue and earnings growth due to newer competitors potentially offering more aggressive terms or innovative products.
  
• The Group Retirement segment showed dependence on inflows from the LifePath Paycheck product which, if not sustained or expanded through additional relationships, could hinder expected cash flows and earnings from this segment.
  
• Capital strain from rapid growth in both Individual Retirement and Group Retirement products, despite being capital-light, might become an issue if inflows significantly surpass expectations, potentially affecting the capital allocation and shareholder returns.
  
• The protection segment's volatility in mortality results, despite being a smaller part of earnings, might lead to larger-than-expected capital adjustments or necessitate reinsurance arrangements that could impact profitability.
  
• Operational and execution risks associated with strategic focus areas like Wealth Management's growth and private markets expansion could limit the ability to achieve targeted earnings increases, especially if market conditions change or expected inflows do not materialize.

Valuation

• The analysts have a consensus price target of $48.09 for Equitable Holdings 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 $59.0, and the most bearish reporting a price target of just $43.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $17.8 billion, earnings will come to $2.2 billion, and it would be trading on a PE ratio of 6.4x, assuming you use a discount rate of 7.4%.
• Given the current share price of $41.98, the analyst's price target of $48.09 is 12.7% 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.