Envestnet - Positioned For Continued Growth

Mar. 7.14 | About: Envestnet, Inc. (ENV)

Summary

A shift in the preference of individual investors toward independent advisors is a huge wind in the sails of Envestnet.

Envestnet is expensive but still has upside, $84 price target.

Institutional ownership of Envestnet is on the rise.

There is a wind of change taking place in the world of investment advisory services as individual investors seek independent fee-based services. Envestnet (NYSE:ENV) is wisely positioned to provide solutions and services to a wide range of investment advisory firms. From the company's website:

We are an independent provider of technology-enabled, Web-based investment solutions and services to financial advisors. By integrating a wide range of investment solutions and services, our technology platform provides financial advisors with the flexibility to address their clients' needs. We work with financial advisors who are independent, as well as those who are associated with small or mid-sized financial advisory firms and larger financial institutions.

ENV reported the following Key Operating Metrics (AUM/A Only) in their most recent quarterly/year-end report as of December 31st, 2013.

Assets: $177.9 billion, up 81% from December 31, 2012

Accounts: 735,845, up 64% from December 31, 2012

Advisors: 22,838, up 42% from December 31, 2012

Gross sales: $20.4 billion, resulting in net flows of $10.5 billion

More information on ENV's fourth quarter and full year 2013 results can be found in the company's February 20th, 2014 earnings report.

It appears ENV is going after a high-growth area of the financial services industry and executing well. In this article, we will look at financial performance of ENV compared to the following three other companies: Financial Engines (NASDAQ:FNGN), Waddell & Reed Financial (NYSE:WDR), & LPL Financial (NASDAQ:LPLA).

I chose these companies for comparison because I come across each of them in my research; I have owned one of them previously and currently own shares in ENV. All three companies primarily serve individual investors. While ENV sells to financial advisors, those advisors are primarily serving individual investors. There may be better company comparisons but these are the companies I am most interested in potentially owning and I believe they make fine comparisons.

Definitions for financial metrics are provided at the end of the article.

Let's first take a look at top-line sales growth for all 4 companies:

Sales Last 4 Qtrs

Latest Qtr.

2-Qs Back

3-Qs Back

4-Qs Back

ENV

68%

65%

36%

43%

FNGN

27%

28%

30%

29%

WDR

24%

18%

15%

10%

LPLA

16%

16%

12%

8%

Click to enlarge

Data provided by Marketsmith

The above grid compares the last 4 quarters of sales growth for each company. As you can see, ENV is clearly outpacing the group. More impressive is the acceleration in recent quarters.

Next we want to look at how much of the top line makes it to the bottom line:

EPS Growth Last 4 Qtrs

Latest Qtr.

2-Qs Back

3-Qs Back

4-Qs Back

ENV

50%

56%

86%

71%

FNGN

38%

54%

45%

50%

WDR

51%

31%

29%

15%

LPLA

26%

19%

24%

14%

Click to enlarge

Data provided by Marketsmith

As a group they are all delivering impressive bottom line numbers. ENV topped the group 3 out of 4 periods and essentially tied in the most recent quarter with WDR. WDR is delivering a component of acceleration which can be a very bullish characteristic. Continued share price appreciation for ENV will likely require the continued balancing of internal capital needs with bottom-line earnings growth. This is clearly a risk for investors in ENV.

How does longer-term earnings growth compare?

Ann. EPS Growth Last 3 Years

2013

2012

2011

ENV

69%

-31%

68%

FNGN

50%

32%

-3%

WDR

32%

13%

10%

LPLA

20%

4%

23%

Click to enlarge

Data provided by Marketsmith

Other than the 2012 EPS growth, ENV has delivering outstanding annual bottom-line growth the last three years compared to the group.

Here is another look at earnings via the Marketsmith proprietary EPS Growth Rate and Earnings Stability ranking.

ENV

FNGN

WDR

LPLA

EPS Growth Rate

48%

61%

20%

33%

Earnings Stability

46

93

10

26

Click to enlarge

Data Provided by Marketsmith

ENV delivers a strong EPS Growth Rate but comes up a little short on Earnings Stability. 2012 results likely impacted the rating. Ideally ENV can stabilize bottom line results going forward. Their performance in this area is a significant risk given ENV's current valuation. WDR does the best job of the group delivering stable annual earnings.

When we dig into the next set of metrics, we get additional clues regarding the riskiness of ENV's share price.

ENV

FNGN

WDR

LPLA

Return on Equity

14%

13%

43%

N/A

Debt Level

0%

0%

28%

116%

% R&D

N/A

13.0%

N/A

N/A

Annual Pre-Tax Margin

10.0%

25.7%

22.3%

10.0%

Click to enlarge

Data provided by Marketsmith

Nothing spectacular for ENV, and reason again management must execute well on business strategy as well as financial management to continue being rewarded with a high premium stock value. The low annual pre-tax margin is the biggest concern. LPLA with a debt level of 116% is a bit on the higher side as well. WDR comes across as the strongest of the group on these measurements.

A few other helpful metrics:

ENV

FNGN

WDR

LPLA

Current P/E Ratio

80

79

23

22

Market Cap

$1.5 Billion

$2.9 Billion

$6 Billion

$5.5 Billion

1 Year Price Return

185%

83%

74%

76%

Sales Ttl Last 4 Qtrs

242.5 ($Mil)

239 ($Mil)

1.4 ($Bil)

4.1 ($Bil)

EPS Ttl Last 4 Qtrs

$0.54

$0.73

$3.02

$2.44

Next Year EPS Estimates

$0.72

$0.94

$3.70

$2.72

Next Year EPS Estimates Growth Rate

33%

25%

23%

11%

Click to enlarge

Data provided by Marketsmith, except 1-year price return provided by Stockcharts.com

With a current P/E of 80, ENV has been rewarded with a high valuation. This is due largely to its historical as well as estimated future growth rates. The stock has a lot of growth opportunities in the rapidly transitioning investment advisory market.

ENV has seen a huge increase in the number of mutual funds reporting positions in shares of the company at the end of the year, up 17% (221) from the prior quarter. While still a relatively small number of mutual funds, the number of new funds taking positions is encouraging; several top performing mutual funds I track own shares in ENV.

In a side by side comparison, it is clear ENV has performed on par with peer in most areas and is currently experiencing the fastest top and bottom line growth. Of the group, ENV is expected to deliver the strongest EPS growth in 2014. Assuming ENV can continue to execute well and maintain a P/E of 80, the stock could trade for $84 a share in the next 18-24 months based on a 2016 earnings estimate of $1.05 (46% growth over 2015). These are high thresholds for certain but we have seen young high-growth companies deliver this type of performance in the past and ENV looks well positioned to deliver.

Mutual Fund Ownership Reporting Provided By Marketsmith

EPS Growth Rate: The compound growth rate using the least squared fit over the latest two to three years' earnings per share on a running 12-month basis.

Earnings Stability: Indicates in percentage from one standard deviation of the variability around the trend line fitted through 3 to 5 years of earnings' history with a scale ranging from 1 to 99. Lower numbers represent more stable company earnings history.

Return on Equity: The amount of net income returned as a percentage of shareholder equity.

Annual Pre-Tax Margin: Calculated by dividing annual income by annual sales.

Disclosure: I am long ENV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: No investment recommendation has been made in this article. Investing involves risk including the loss of capital. Conduct your own research before making an investment decision.