The Blackstone Group L.P. (BX) has been in the news recently as the company is in talks with Deutsche Bank (DB) to sell ~$270M in "Rent-Backed Securities" to numerous investors. This will boost the firm's net working capital and help monetize a small part of its $64B Real Estate AUM. In the past couple of years, Blackstone has been snapping up residential homes, turning them into rent-income assets. Apart from real estate, Blackstone operates in four other businesses: Private Equity, Hedge Funds, Credit, and Financial Advisory. The following charts demonstrate the trends in the growth of revenues across the segments:
The biggest percentage growth has been in Financial Advisory followed by Real Estate business.
From the investors' point of view, the company has delivered outstanding returns in the last 48 months in terms of stock price appreciation and dividend streams:
Blackstone has outperformed its peers and beat the S&P 500 by a significant margin:
Now let us focus for a moment on the Comps and see where Blackstone's major publicly-traded competitors stand:
The firm is traded on the second-highest price-to-book value multiple of almost 5X, reflecting its ability to deliver outstanding returns for its investors. Oaktree's (OAK) ~27X P/B is not meaningful at these levels. Blackstone also has delivered the highest adjusted EBITDA of ~$2B and has decent margins at the current revenue level. Dividend yield of 4.6% may not be the most attractive on the list but it is certainly sustainable in the long-run given a TTM payout ratio of ~43%. The company has not been doing any significant stock repurchasing lately but has slowed down common share issuance in the past year:
On the contrary, Blackstone has been raising debt aggressively in the past 3 years:
This helped drive returns, increased default risk, and drove the cost of capital down.
In the recent 2013Q2 conference call, Blackstone showed an outstanding growth in fee-earning AUM and demonstrated high levels of unemployed capital, or "dry powder":
The more accurate sum-of-the-parts (SOTP) valuation required for a business like Blackstone posed a trouble for me because of the complex revenue structure (projecting fee revenues is not a problem but forecasting carried interest realizations is a task close to impossible). I chose the more common DCF approach (90% of valuation) and the Discounted Dividend Stream method (10%). All the assumptions as well as in-process calculations are available in the downloadable workbook.
For the DCF model I used the more popular EV/EBITDA multiple metric in the calculation of Terminal Value (TV). In order to be more precise, I ran the numbers and assessed the historical multiples for this metric:
Here is the output of the DCF model and the applicable sensitivity tables:
I would like to provide readers with a visual representation of the fair value's composition:
My ~$33 target for Blackstone's stock is higher than Citi's estimate of $30 per share. I give the stock a 10% premium because of its ability to pay decent and sustainable dividends in the long-run at current yield. Sensitivity analysis shows the price of $36 is still within the fair values range.
Graham Number gives a price of $23.3 per share; book value per share is $9.85. In the past 52 weeks, the stock traded between $13 and $24.3 and now is trading near 52wk high levels.
I issue a "BUY" recommendation for Blackstone with a target range of $30-$36 per share. This represents an approximately 30% - 56% upside from current price levels. Keep in mind that about 11% of the fair value is attributable to cash returns in the form dividends.