Two Asset Management Companies Still Have Room for a Rebound

Almost no industry group was slammed harder in the crash of 2008 – 2009 than the asset management companies. They suffered from both net asset withdrawals and huge mark-to-market reductions in the remaining assets under management [AUM] which slashed their earnings from record levels in 2007.

The stocks of the publicly traded managers were devastated. Here’s a chart showing some of the damage from the 2007 peaks to their recent troughs:

Company	2007-2008 Peak	2008-2009 Low	% Drop
Affiliated Mgrs. Group - AMG	$136.50	$17.90	-86.9%
Alliance Bernstein – AB	$94.90	$10.12	-89.3%
Eaton Vance – EV	$50.00	$11.90	-76.2%
Federated Investors – FII	$45.00	$15.80	-64.9%
Franklin Resources – BEN	$145.60	$37.10	-74.5%
Janus Capital – JNS	$37.10	$3.70	-90.0%
Legg Mason – LM	$110.20	$10.40	-90.5%
T. Rowe Price - TROW	$70.20	$20.10	-71.4%
Calamos Asset Mgt. - CLMS	$34.61	$2.55	-92.6%

While the revenues and earnings suffered greatly all the firms appear financially sound and all have made nice rebounds since the March lows.

Company	2008-2009 Low	July 31, 2009	% Rebound
Affiliated Mgrs. Group - AMG	$17.90	$66.92	+273.8%
Alliance Bernstein – AB	$10.12	$19.95	+97.1%
Eaton Vance – EV	$11.90	$28.50	+181.6%
Federated Investors – FII	$15.80	$26.10	+65.2%
Franklin Resources – BEN	$37.10	$87.10	+134.8%
Janus Capital – JNS	$3.70	$13.40	+262.2%
Legg Mason – LM	$10.40	$27.85	+167.8%
T. Rowe Price - TROW	$20.10	$46.70	+132.3%
Calamos Asset Mgt. - CLMS	$2.55	$14.00	+449.0%

I had written positively about AB, FII, BEN and CLMS previously and have recorded big gains by picking up shares when fear was running rampant.

Alliance Bernstein reported earnings today. While EPS, not surprisingly, was down from a year ago they came in at $0.41 /share – six cents better than the expected $0.35 consensus view. Sequential AUM were up 9% as of June 30th and they certainly should have risen nicely with the wonderful market action we’ve seen this month. AB is heavily involved in the equity markets and should benefit greatly as stocks rebound.

In the ten-year market cycle from 1999 – 2008 Alliance Bernstein never earned less than $2.12 per unit (they trade as a master limited partnership) and had peak earnings of $4.33 (in 2007). Value Line sees normalized earnings power of $2.85 /unit within their 3 – 5 year projection window. That seems reasonable to me based on past history. AB’s ten-year median P/E has been 16x. A return to even 14x those normalized earnings would lead to a $40 share price or just about double today’s $19.95 quote.

As a master limited partnership AB must pay out the bulk of its annual earnings to its holders each year. In the 10-year period 1999- 2008 this distribution ranged from an annual low of $1.19 (in 2004) to a high of $4.75 in 2007’s bull market. By the time things get back to normal it is likely to expect at least a $2.50 /unit annual distribution again. That would equate to 12.53% of today’s unit price. That’s quite attractive in our present ‘low interest rate’ world. I would predict at least $1.05 for the current year based on a 90% payout ratio on Zacks’ 2009 estimate of $1.17/unit.

I’m a buyer of Alliance Bernstein today on the weakness following the earnings report. Shares are down around 8% today on what I consider decent news. I’m also a seller of puts for January 2010 at strike prices of $17.50, $20.00 and $22.50.

Here are some typical trades that have been available today:

Strike Price (Jan. 2010 exp.)	Put Premium Received	Net Cost (if Put)
$17.50	$1.60	$15.90
$20.00	$2.75	$17.25
$22.50	$4.20	$18.30

I’d be happy to own more AB at any of those net prices.

I did a similar play with Federated Investors when they reported their earnings on July 24th and the shares fell into the $22 - $23 range. FII has traded above $26 today. See my earlier write-up on FII for full details.

In summary:

I like this group for long-term gains but I’d rather play the names that have not yet made the big moves off their lows. Alliance Bernstein is my favorite of the group at today’s price (it was a few dollars higher just a couple of days ago).

I’d recommend buying the units and/or selling some puts. With upside this substantial I’d wait for a nice move up before writing any covered calls. You should receive at least 5% - 8% in distributions over the next 12 months with the distinct possibility for much bigger payouts in the medium to long term.

Disclosure: Author is long Alliance Bernstein, Calamos, Franklin Resources, and T. Rowe Price shares and short their options.

Comments

[tc1:]

Paul, another fine article you've given us, this time on a sector i'd not been following.

I note, in doing some due diligence on AB, that two analysts have lowered the 1Y-target to just $20 --below AB's shareprice today.

Perhaps even more damaging, a discrimination lawsuit, announced in late May, alleged unsavory stuff that could keep a lot of investor money away. Yes, i know that various firms have been hit with these lawsuits, but it might be just enough to keep away a significant percentage of those all-important inflows of AUM.

Here's the blurb on the article about the lawsuit (which i found at Marketwatch.com). I won't reproduce the entire piece due to copyright issues:

"AllianceBernstein's Former HR Head Files Tell-All Suit

Article published on May 29, 2009
By Peter Ortiz

The former top HR executive with AllianceBernstein has hit the firm with a highly charged lawsuit that details allegations of sexual and racial discrimination involving some of the firm’s top managers. [...snip rest of article]"

Aug 01 10:38 AM

[Paul Price:]

I'll give the most weight to their basic business value which is growing rapidly as asset prices inflate. The lawsuit is 'old news' as far as already being reflected in the unit price.

I can't imagine many investors caring about that when they choose which funds to buy or hold.

Ultimately AB will trade based on earnings and yield and, on that basis, I see at least a double over the next 3 - 5 years on top of all the distributions. A triple is not out of the question in my view.

Aug 01 10:24 PM

[ozcutty2:]

Nice article, i too saw the potential of this group when i read a headline "Worst ever results for Asset Managers"
I jumped on board AB for its simplicity of operations. Did own some LM but didn't like the debt and SIV issues.
I agree that we should see 40-60 in a few years, possibly even higher if we see a new bull market and if inflation inflates the market

Aug 18 09:17 PM

[Paul Price:]

ALLIANCE BERNSTEIN HOLDINGS (NYSE:AB) Strong Uptrend $25.50/share

Smart Scan Chart Analysis confirms that a strong uptrend is in place and that the market remains positive longer term. Strong Uptrend with money management stops. A triangle indicates the presence of a very strong trend that is being driven by strong forces and insiders.

Based on a pre-defined weighted trend formula for chart analysis, AB scored +100 on a scale from -100 (strong downtrend) to +100 (strong uptrend):


+10 Last Hour Close Above 5 Hour Moving Average
+15 New 3 Day High on Thursday
+20 Last Price Above 20 Day Moving Average
+25 New 3 Week High, Week Ending September 12th
+30 New 3 Month High in September

+100 Total Score

Sep 10 12:12 PM

[Paul Price:]

BofA-Merrill raises Janus Capital, Calamos to buy

Sept 25 (Reuters) - Banc of America-Merrill Lynch upgraded Janus Capital Group Inc (JNS.N) and Calamos Asset Management Inc (CLMS.O) to “buy,” saying an improving dollar might draw more investors to U.S. equity next year, benefiting the asset managers.

Sep 25 10:10 AM

[Paul Price:]

AllianceBernstein (AB): Q3 EPS of $0.67 beats by $0.22. Revenue of $806M (-5%) vs. $737M. AUM down 16% Y/Y to $498B.

Shares +3.8% after hours

Oct 30 08:16 AM