Cohen & Steers: Overpriced And In Decline

| About: Cohen & (CNS)

Summary

CNS has high returns on equity and assets, however its earnings are volatile and it has a history of poor growth.

The asset management industry is currently facing significant competition and growth challenges.

Margin of Safety: Significantly overpriced (almost double).

This article includes an analysis of Cohen & Steers Inc. (NYSE:CNS), including historic cash flows, business operations, and a forecast of 10 year future cash flows for the business. The present value of the business cash flows are then discounted at the 10-year treasury bond rate, allowing readers to assess this business against other similar investments. A safety margin is introduced with respect to expected cash flows to identify the minimum entry price. I do the same thing for each business I review, allowing investors to compare using the same yardstick.

Note: I found this company by screening for the following statistics:

  • Small to medium cap
  • ROE: >25%
  • Return on Assets: >15%
  • Trailing P/E: 0-20

Description of the Business

With an IPO in August 2004, CNS is an investment advisory (services) business that sells specialized asset classes, specifically real assets such as global real estate, infrastructure, commodities, and natural resource equities. It also sells preferred securities, limited partnerships and large cap value equities. CNS' main income "is derived from investment advisory fees received from institutional accounts and investment advisory, administration, distribution and service fees received from open-end and closed-end funds" (2015 Annual Report). In other words, it gets its money through service fees for financial services (i.e. managing a company's retirement fund or high net worth individuals) and through selling financial products like mutual funds. Note CNS is a holding company for:

  • Cohen & Steers Capital Management, Inc.;
  • Cohen & Steers Securities;
  • Cohen & Steers Asia Limited;
  • Cohen & Steers UK Limited;
  • and Cohen & Steers Japan, LLC.

Financial Analysis

Let's start with financials so we don't waste our time if things look bad. The following table summarizes the historic results of CNS. Although I only show from 2009, I also calculated the data back to 2006:

2009

2010

2011

2012

2013

2014

2015

20161

Shares (million)

42

43

44

44

45

46

46

46

Dividends

$0.20

$2.40

$1.6

$2.22

$1.8

$1.88

$1.5

$1.54

Net Income

(million)

-$2

$46

$54

$66

$68

$76

$65

$89

Net Income/

Share

-$0.04

$1.07

$1.23

$1.49

$1.51

$1.65

$1.41

$1.92

Payout Ratio

-495%

224%

130%

149%

119%

114%

107%

80%

Book value (million)

$264

$213

$211

$196

$203

$207

$212

$252

Book value/share

$6.23

$4.93

$4.79

$4.42

$4.50

$4.54

$4.63

$5.44

Notes: (1) 2016 values were forecasted based on 2016 Q3 results.

Based on these historical performance figures, the average compounding growth rates are:

9 year

5 year

3 year

Shares (million)

1.20%

1.07%

2.86%

Dividends

9.81%

-0.76%

-14.44%

Net Income

2.35%

10.34%

30.40%

Net Income/

Share

1.14%

9.18%

26.77%

Payout Ratio

8.58%

-9.10%

-32.51%

Book value (million)

-0.44%

3.69%

24.44%

Book value/share

-1.63%

2.60%

20.97%

The 3 year averages are not terrible, which is what grabbed my attention off the stock screener, warranting further analysis. Overall, I'm not impressed. Specifically the net income, dividends, and book value show volatility over the history of the business. When we look further into the risks it's clear why.

Risks

I'll quickly summarize the issues/risks with the business. If you are thinking about buying this security or an other security in the investment services industry, I highly recommend you read the first 3 pages of the 2015 annual report:

"It is time to acknowledge the truth. Long-only active asset management in its current form is no longer a growth industry." (2015 Annual Report)

  • A significant portion of CNS' revenue for 2015 was derived from a single institutional client;
  • The industry is facing strong competition from index funds and public REITs;
  • Baby boomers are switching from equity securities to safe fixed products;
  • There is increasing competition for asset managers and increasing performance demands;
  • There are increasing costs associated with services (i.e. regulations, distribution, marketing, IT).

If you look at it with Porter's five forces, it's looking like the industry is facing significant issues with future profitability. I could go on, but if you haven't been scared away yet, let's continue with the valuation. This could turn out to be a reasonable business if we get it for the right price with a padded margin of safety.

Valuation

In the following table I calculated the present value of the cash flows using the 10 year US Treasury rate (2.5%) based on the business' 5 year performance. This seemed reasonable, especially given the volatility in the business economics:

Historic cash flows (5 years)

PV of Dividends (2.5%)

Changes in BV

2017

$1.49

$0.142

2018

$1.48

$0.145

2019

$1.43

$0.149

2020

$1.39

$0.153

2021

$1.34

$0.157

2022

$1.30

$0.161

2023

$1.26

$0.165

2024

$1.22

$0.169

2025

$1.18

$0.174

2026

$1.14

$0.178

Total

$13.23

$1.59

Current BV

$5.44

PV Cash flows (2.5%)

$13.23

$5.50

Intrinsic Value

$18.73

If you paid $18.73 per unit for a treasury bond (zero risk) with these cash flows and a face value at the current book value, you would get an annual return of 2.5%. At $35.07, CNS is trading at an 87% premium to the risk free rate based on 5 year historics. Note that I would only pay $18.73 if I was 99.999% sure these cash flows would occur. This stock is severely overpriced even without a safety factor to dilute the cash flows.

Price

Although I don't think I would ever buy this business, I'll suggest an entry price. Based on the volatility of the business and the uncertainty of the industry, I would buy at around $5-6. If you own this business, I suggest you sell. I will continue my search for a good small cap business that is trading with a reasonable margin of safety.

Cheers,

Wayne

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

About this article:

Expand
Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Tagged: , , , Asset Management
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here