Corporations have a tendency to buy back shares at high valuations and issue shares at low valuations. For example, banks bought back lots of shares in 2007 only to issue them back into the market in 2009 after their stock prices had crashed 90%+. Today's headlines that the private equity firms are buying back shares don't mean much unless shares are truly undervalued.
The shares of Fortress Investment Group (NYSE:FIG) are undervalued and management is doing a smart thing by buying back shares. I believe that the stock could more than double from current valuations.
Fortress's net cash and investments on their balance sheet is alone worth $2.85 (although some of that value is mark-to-model private equity holdings.) The embedded value is almost 70% of the stock price! What do you get for the other 30%: $74B in total AUM, $7B in permanent capital and $9B in dry powder (mostly for credit funds). Once the embedded value is stripped out, the stock trades at less than 2x expected 2015 earnings. Management is smart to be buying back shares at this prices.
On the Oct. 29th earning call, Wes Edens, the co-CEO, said: "My view about it is our valuation is ridiculously low. When you look at the foundation business on the Credit side and the consistency of earnings there, and the foundation of what we have in the Permanent Capital Vehicles as well as our Private Equity, that plus our balance sheet we think is really a ridiculously low valuation. I think the way to address that is to try and create as much simplicity and transparency as we can. " That was when the stock was trading at $5.9!
So why so cheap? Assets can leave. Incentive fees can disappear. Model valuations can be unrealistic. Assets prices can fall. All true, which is why asset managers should be valued much less than a 16x average market multiple. But 2x earnings? That seems extreme to me. The stock had gotten beaten up due to all the bad press about the macro fund blowing up last year, but that was immaterial to earnings. Once the markets start focusing on earnings, the stock price should start moving up again.
Disclosure: I am/we are long FIG.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.