Barron's highlighted the ebullient valuations accorded some asset management stocks in an article this weekend entitled "Slim Pickings."
For the most part, I do agree with the conclusion that there are few bargains to be had in this sector. The profitability of this industry is truly remarkable, but starting to be reflected in generous multiples.
Two names do stand out in my mind: Federated and Nuveen.
Federated Investors (FII) has a return on invested capital of 23.3% as well as a very high operating margin of almost 33% in the 2005 year.
The company has bought back over $480 million in stock in the last five years as well as paid out about $140 million in dividends. The share count has been significantly reduced in the last five years from 120 million shares to a current 108 million (fully diluted). The five year growth rate in the dividend has been 32.9%, well above the industry average. The stock trades at about 14 times EV/EBIT based on yesterday's lift in the stock price.
Contrast this with Waddell & Reed Financial (WDR) with a return on invested capital of 13.5% currently, well below historical averages. The last significant buybacks for WDR occurred in 2001 and 2002, but the five year total did amount to just over $300 million.
Consequently, the share count in the last five years has shrunk only slightly from 83.4 million shares to 82 million (fully diluted.) The five year growth rate in the dividend is only about 11.2%. Yet, the stock trades at a higher multiple of EBIT at 18.2 times.
John Nuveen or what is now known as Nuveen Investments (JNC) is also favorably mentioned in the article. JNC has bought back some $312 million in stock in the last five years. It share count over the applicable time frame has been significantly shrunk to 86 million shares from 101.6 million in 2001. Its five year growth rate in dividends is about 14%. On an EV/EBIT multiple the company trades at 14.7 times.
The mix of assets under management varies considerably among these companies with FII managing primarily money market (about 75%) and WDR primarily (over 80%) equity oriented. JNC, known historically for its muni bond expertise is now much more balanced between fixed income and equity management.
Bear Stearns upgraded FII yesterday, noting its valuation as well as its potential to merge with another money manager.
It should be noted that Federated has resolved with the SEC and the NY Attorney General its mutual fund trading issues regarding market timing, late trading and foreign security valuation.
I and my family do not currently have a position in FII, WDR, or JNC. I do have clients with a position in FII.