- Blackstone is an innovative, leading player in the fast-growing alternative-asset management industry.
- Blackstone's 2-and-20 fee structure on assets under management give it significant operating leverage, and allow it to maintain excellent margins amid rapid growth.
- Blackstone trades at a P/E TTM of 15.3, a valuation which does not reflect its extremely favorable future growth prospects.
Blackstone Group (NYSE:BX), the leading alternative-asset manager, is highly undervalued, with almost 200% upside over the next five years.
The company is one the largest alternative-asset managers in the world, with almost $250 billion in assets under management (AUM) across its various private equity, real estate, distressed debt, etc. strategies. The company has several competitive advantages in a rapidly growing industry, and is well-positioned to take advantage of several tailwinds over the next few years. These tailwinds are not represented in the company's current valuation, providing an opportunity for savvy investors to scoop up shares of this high-quality company at a bargain price.
The alternative investment industry is one of the fastest-growing in the financial world. As these investments beat the markets with less volatility in the last decade and through the financial crisis, interest has soared and huge amounts of money are flowing to this sector. Private equity AUM alone recently hit $3 trillion, and is expected to continue to grow exponentially. Blackstone is at the forefront of this secular shift. It is the leading brand in the industry, and when the industry grows, so does Blackstone. As AUM grows sharply, Blackstone's revenues from its 2-and-20 fee structure will grow sharply as well. With its fee structure, it should be able to maintain excellent profit margins as well (current operating margin is 55%).
Another advantage Blackstone has is its brand name. The most talented college and business school graduates aspire to work at the firm. Blackstone is the leading choice for many pension funds, endowments, family offices, etc. This brand name, which is especially valuable in the reputation-based financial services industry, will serve to protect Blackstone from its largest competitors (KKR, Carlyle (NASDAQ:CG), etc.), as well as from other upstart asset managers.
Blackstone has also been on the cutting edge of its industry constantly and consistently, and has proven its ability to remain highly adaptive to industry shifts even as its size grows. For example, Blackstone was one of the first firms to lower its funds' investment minimums in order to open up to individual investors, and in the first three months of this year, the firm raised $2.5 billion from individual investors. As the world's middle class grows at a faster clip than ever before, Blackstone's efforts to open up to lower net worth clients will pay off in rapid AUM growth, and the beginning of this trend can already be seen.
Over the past five years, Blackstone has grown EPS at an astounding 30.47% annually. With a rapidly growing market and industry, as well as significant competitive advantages, Blackstone's revenues should continue to grow almost as rapidly over the next five years. Since the firm has relatively low variable costs due to its fee-based business model, expenses should rise approximately in line with revenues. Based on these assumptions, I would expect EPS to grow at about 24-26% annually over the next five years. Currently, the stock has a P/E TTM of 15.3. In five years, I would expect this to decrease to about 12 (to account for lower growth prospects in the distant future). In addition, the stock has a dividend yield of 4.25%, which I expect to remain steady. Summing this up gives a total expected return of about 25% annual EPS growth + 4% dividend yield - 12/15 * 25% EPS (for P/E contraction) = 24% annual. This represents almost 200% upside in five years, giving the stock a five-year price target of $96 per share, compared to $32 per share right now. The current PEG ratio of 0.47 supports this growth-at-a-reasonable-price (GARP) investment thesis.
Overall, Blackstone Group is a high-quality, leading firm in a hot, fast-growing industry. The company's brand name and consistent innovation, as well as favorable secular trends, give it a large future growth runway. The current stock valuation does not reflect the company's growth prospects, leading to 200% upside over the next five years.