Many think 2013 will be the year of the asset manager. There is a large amount of economic uncertainty. The EU is in recession. The US may go into recession soon. If the US does go into recession, it will virtually ensure a hard landing for China. Many Chinese loans were made with the expectation of 10%+ GDP growth per year. The Q3 2012 Chinese GDP growth was 7.4%. Many think it rose in Q4. However, if its two biggest export markets are in recession, China is likely to go into recession. Don't forget that the Japanese economy shrank in the September 2012 quarter (-0.9% for the quarter of -3.5% annualized). Japan may enter recession too soon. If all the above happens, China's GDP growth could slow to +5.0% or lower. At this rate of growth, a lot of Chinese loans will go bad. China has been growing rapidly. That means it has had a lot of recent loans. If a significant proportion of these go bad, it may mean a credit crisis for China that is relatively worse than either that of the US or that of the EU. I have seen predictions of necessary write-offs of $2T to $4T. Given that China is a smaller economy than either the US or the EU (in total), this amount of bad debt could be a horrendous burden on its economy. Further it could scare investors away, which would exacerbate the problem further.
A great asset manager might be able to navigate this uncertain scenario to its own and to its clients benefit. Blackstone Group LP (BX) may be just such an asset manager. It is relatively young and agile. It was founded in 1985, and it has had a good record since then. It is not mired in the past as older institutions can be. Blackstone grew up as the emerging markets were emerging. It followed and admired them, as it grew itself. They are just competitors to Blackstone. Older companies can fall into the trap of thinking the emerging markets inferior or insignificant. Blackstone instead lives in a "real" world. It has fewer legacy prejudices. This is good news if you are considering investing in Blackstone.
Blackstone operates in five major segments: Private Equity ($50B AUM -- assets under management), Real Estate ($54B AUM), Hedge Fund Solutions ($46B AUM), Credit ($55B AUM), and Financial Advisory. This breadth of experience should allow it to migrate its assets effectively from down trending to up trending sectors. For instance, the US Fed is clearly acting to support the US real estate markets. Even in a recession, the US real estate markets should be able to perform reasonably well. They have only just begun to recover from their fall in the last recession. A further dramatic fall is unlikely. BX's strategy of "buy it, fix it, sell it" should work well in this Fed supported environment.
BX's private equity segment can invest in troubled companies, etc. at or near the depths of the US recession or the US downturn that is likely coming in 2013. Its hedge fund arm can short bonds (or take other appropriate actions) at the appropriate time(s), if the yields start to rise as the EU begins to recover at the end of 2013 (Draghi's prediction). Perhaps the best bond shorts will be in the stronger European bonds? The hedge funds solutions segment experts will likely know.
The financial advisory arm of BX should benefit from the expertise in all of the other segments. BX fosters a culture of shared intellectual capital across its businesses. In 2013 it may profit from this culture immensely. BX should be able to do a better job of timing the different moves in the markets. Its extensive global presence and network should help. As an example, BX can take advantage of the relatively steady interest rate spreads. It can invest in the likely undervalued non-agency RMBS, CMBS, loans, actual real estate, etc. (or in companies that do this investment) to its ultimate gain. BX's real estate arm should be able to advise the other arms on how to time the changes in these markets. Real estate may be one of the most profitable areas in 2013 and beyond.
With all this in mind, it is appropriate to take a look at how BX has done most recently. For Q3 2012 it beat on earnings. It reported EPS of $0.55 per share versus an estimate of $0.42 per share. This was far better than the year ago quarter's loss of -$0.34 per share. BX's economic net income similarly outperformed. BX reported economic net income of $621.8 million for Q3 2012. This was up from $212.4 million in the prior quarter and up from an economic loss of -$380.0 million in the year ago quarter. Revenues were also up substantially to $1,223.1 million in Q3 2012 from $124.1 million in the year ago quarter. This also beat estimates. Distributable earnings were $190 million or $0.15 per common unit. That was up 50% from the year ago quarter. BX paid a $0.10 distribution for Q3 2012. BX plans on having a catch-up for distributions following Q4. It has not yet announced exactly what this will be. However, this may be important to those who are considering buying BX. It also means that the 2.48% dividend it currently pays is likely to go up.
To get a more exact idea of how and what one of the segment arms is doing, a summary of the Q3 Credit segment performance is below.
The above is not the end of BX's good growth. Analysts estimate that it will grow 30.40% in FY 2012 and 27.60% in 2013. It currently trades at a PE of 94.50; but its FPE is a much more desirable 7.77. This compares well to competitors. It also means that the distribution/dividend is very likely to increase in the near future. The above are likely reasons analysts have given BX an average recommendation of 1.9 (a buy). Zacks has given it a #1 ranking (a strong buy). CAPS members have given it four stars. In sum BX is a buy, even in this troubled environment.
The two year chart of BX gives some technical direction to this trade.
The slow stochastic sub chart shows that BX is currently overbought. The main chart shows that BX has been in an uptrend since the summer of 2012. Its recent results argue this uptrend should continue. A spike up this week may result in a very near term pullback, but the fundamentals are good. Plus Fact Set says EPS for the S&P 500 Diversified Financial Services sector are estimated to rise +54% year over year on average for Q4. BX is virtually assured to outperform in this "hot" sector. Again it is a buy.
The only gotcha is that the overall market could go down. There is still the sequestration issue to be dealt with (put off for two months until March 1, 2013), the entitlement cuts issue, the federal budget deficit limit issue, etc. On top of this there will be more austerity in 2013. The payroll tax cut legislation got axed via the recent fiscal cliff deal. Tax rates were raised on the rich (families making over $450,000 per year). There will be less spending because people will have less discretionary income to spend. The stock market may fall on flat to falling revenues and EPS, and narrower margins. With this in mind, it may be appropriate to average into BX over the next year. If it gets dragged down appreciably with the market, you will still get a good average price for it. If it continues to go up unabated, you will only have to pay slightly more.
Note: Some of the fundamental data above is from Yahoo Finance.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BX over the next 72 hours.