Invesco: Further Gains On The Cards

Summary

• Q3 showed growing AUM, growing sales and adjusted operating margins of over 40%.
• Chinese business set to drive the next wave of growth for the firm.
• Despite the run-up in shares, the valuation remains attractive here.
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Although shares of Invesco (NYSE:IVZ) did not manage to break through multi-year resistance in June of this year, we do not believe a topping pattern is in play here. Just look at the significant momentum shares delivered into that June top this year. That slingshot move which took place over the course of approximately 13 months resulted in a strong bullish divergence on the momentum indicator. Suffice it to say, we believe overhead resistance only delayed bullish proceedings in Invesco this year. We envisage another onslaught on overhead resistance before this fiscal year is done with.

We wrote about Invesco back in September of last year when we stated that shares were very close to delivering a technical buy signal. The technicals were being backed up by the increasing AUM number at the time and the market also took favorably to management's decision to cut the dividend in April which took pressure off the company's cash flow. Many times, a dividend cut is frowned upon by the market but not when it is seen that the fundamental business is not at risk. In fact, Invesco still managed to grow its revenues in fiscal 2020 which was a significant result in very difficult trading conditions.

In fact, over the past four quarters on the back of positive inflows, the company has announced four convincing top and bottom-line beats resulting in shares returning an excellent 146% since we penned that initial commentary in September of last year. Therefore, investors need to look at the capital gain here as opposed to what was lost from the reduction in the company's dividend.

Long-term inflows are up approximately $86 billion over the past four quarters alone of which $13 billion came in the most recent third quarter this year. Increased AUM in Q3 drove revenues higher by approximately $31 million sequentially and by $252 million or 17% over the same period of 12 months prior. Furthermore, with margins also on the rise (42% adjusted operating margin in Q3), these trends are producing strong cash flow for the company. We invariably prefer firms which can consistently generate strong free cash flow numbers as this trend invariably increases the firm's net worth and subsequently the share price over time of the company.

Invesco's operating cash flow for example over a trailing twelve-month average at present comes in at almost $1.65 billion. This is the highest number we have seen in this key metric in Invesco and present trends (especially concerning what we are seeing in China) point to more sustained growth for some time to come. Invesco's current ratio bounced back to almost 1 in Q3 due to a significant improvement in cash on the balance sheet. Current trends are pointing to increasing buybacks and a sustainable dividend which can be increased over time. Invesco's dividend yield at time of writing comes in at 2.53%.

Getting back to China, as we can see from the chart below, AUM in China ($99 billion at the end of Q3) has grown by over 40% (CAGR) since 2018 and has become a diversified business across a range of asset classes. Invesco operates in China through a JV partnership and believes it will continue to benefit from being an early adopter in this jurisdiction. Given that China's fund management industry is set to hit $6 billion by 2025, competition is expected to be certainly rife among managers in the coming years. Nevertheless, Invesco believes its longer history (18 years) as well as its unique JV arrangement will continue to result in strong growth numbers. It must be said that he diversification of the company's income streams across multiple asset classes both from retail and institutional clients in China definitely provides a solid base from which operations can potentially thrive going forward.

Source: Q3 Earnings Presentation

In terms of Invesco's valuation, investors who believe they may have missed the boat here should look at the chart below which illustrates how Invesco's present sales multiple of 1.7 compares to historical multiples. For the majority of the past two decades, Invesco's average sales multiple has revolved at approximately the 3 mark which is 76%+ north of where the company's price to sales ratio is trading at presently. Plenty of potential remains here for the long-term investor.

Source: Seeking Alpha

Therefore, to sum up, there are plenty of reasons to remain long Invesco for some time to come yet. Revenue grew by 17% in Q3 whereas EBIT increased by a very impressive 33%. China looks to be the next significant growth engine for the company as the company looks poised for this market to open up aggressively. Despite the steep run-up in the share price over the past 18 months or so, Invesco's sales, assets, cash flow and earnings are not at all expensive compared to historical multiples. We see further gains here going forward. We look forward to continued coverage.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.