Victory Capital Holdings: Undervalued And Poised For Growth
Summary
- Based on its cash flows and comparison to its competitors Victory Capital Holdings is a decent value investment opportunity with a lot of growth potential.
- Company insiders are heavily invested which demonstrates a strong conviction and shows they have skin in the game.
- Strong fundamentals and a history of acquisitions are evidence of the scalable nature of this company and serve as an indicator of future growth prospects.
- Victory Capital Holdings is largely owned by Crestview Partners, L.P. who have a strong history of helping companies scale and grow. This partnership has propelled Victory Capital Holdings and is evidence of its future potential.
Sezeryadigar/E+ via Getty Images
Note: This article was amended on 12/1/21 to reflect adjusted observations related to the company's valuation. The author sentiment has not changed.
Investment Thesis
Victory Capital Holdings (NASDAQ:VCTR) is potentially a long-term growth play. Based on the current high level of conviction from company insiders, coupled with recent acquisitions, Victory Capital is scaling quickly and looking for future growth opportunities. The company is backed by a private equity firm, Crestview Partners, L.P., which has a strong track record with a large talent pool which serves as validation that this is a potential long-term growth stock.
Based on the past growth of free cashflows I believe the company is currently fairly valued but is positioning its self for continued growth in the market. When taking into account past growth and the likelihood of future growth, this company could be a home run opportunity. As with any investment, there are a couple of inherent risks, but these specific risks are heavily outweighed by the company's extremely solid fundamentals and experienced management team.
Company Overview
Victory Capital Holdings was a bank-owned asset management company that transitioned to an independently operated business. Just a few weeks ago on November 04, 2021, Victory Capital announced its definitive agreement to acquire 100% of WestEnd Advisors, LLC marking its 12th investment franchise.
WestEnd has $18 billion in assets under management and offers four primary ETF strategies and one large-cap core strategy. These strategies are held in tax-efficient Separately Managed Account (SMA) structures.
According to the National Association of Plan Advisors in an article from July 2021,
[financial] advisors anticipate decreasing the use of mutual funds by 12% by 2022 while increasing the use of separate accounts by 19% and ETFs by 18%.
With the financial advisor industry moving to more SMAs and fewer mutual fund models, Victory Capital Holdings can benefit largely from WestEnd's SMA structures that will help VCTR adjust to future demands from financial advisors. This positions Victory Capital with strength moving forward and is a way for investors to benefit from the evolving finance industry as advisors leverage SMAs to manage their practices more efficiently.
Fundamental Analysis
Victory Capital Holdings is a fundamentally sound company that will benefit investors in two ways:
1. Investors are purchasing a company that manages its finances well and delivers strong free cashflows which limit the downside risk due to poor financial health.
2. Investors benefit from the company's ability to remain agile and make further investments into its infrastructure through deals similar to the WestEnd Advisor acquisition.
Financials
The company has grown its free cash flows from $38.726 million in December 2015 to $322 million as of September 2021 as demonstrated in the graph below. This is an 831% growth in free cash flow in just under six years. What makes this a great long-term growth play is the consistency in which they've grown their revenues, earnings, and free cash flow year after year, all while keeping their expenses relatively unchanged, as demonstrated in the graph below.
Source: Simply Wall Street
Victory Capital's CEO is very heavily invested in the company owning 2.46% of the company which is roughly $59 million worth of stock. This level of investment into the company demonstrates David Brown (CEO and Chairman of the Board) has skin in the game and a strong conviction of its future prospects.
Source: Simply Wall Street
While ownership in the company alone is not an indicator of competence, David Brown has served as the CEO since 2013 and joined the firm in 2004. David Brown can be credited with a lot of the growth the company has experienced over the past six years through the strategic relationships he has created across the industry. The most notable relationship is with Crestview Partners, L.P.
Crestview-Victory Relationship
In 2013, Cision PR Newswire covered the formation of this relationship and quoted David Brown as saying,
We are pleased to partner with Crestview, a firm that is well known and respected for its asset management expertise and integrity. This new ownership structure will preserve our successful multi-boutique operating model and provide an opportunity for real equity ownership to our employees that will align our interests with those of our clients, today and well into the future.
The entities teamed up while Victory Capital Holdings only managed $22.1 Billion in assets under management (AUM). Since the partnership began between these two companies, Victory Capital has increased its AUM to $162.6 billion as of October 2021.
Crestview just offloaded 3,136,231 shares on November 22, 2021, which is a meaningful liquidation of their position; however, they remain heavily invested in the company roughly with 30 million shares held, according to the Investor Relations division at Victory. This should come as no surprise for investors as Crestview purchased the company in 2013 for $246 million and the company was a huge win for the firm. This type of sale can oftentimes be viewed as a negative, but in this case, I believe Victory Capital Holdings has greatly benefited from the relationship with Crestview and it certainly will continue moving forward as nothing about the day-to-day operations will change fundamentally. This serves as a success story for both firms, allowing Crestview to deploy capital elsewhere and Victory to continue operations as normal.
This is a great opportunity for investors because they have a great company with an experienced management team that has certainly benefited from the relationship with Crestview Partners. The company's vision of the future financial advisory landscape is demonstrated with its most recent acquisition and they have a track record of positioning themselves optimally. I believe this same acquisition style of growth will continue into the future as the company has demonstrated expertise in finding quality acquisitions that benefit the future prospects of the company as a whole.
Valuation
I conducted a discounted cash flow analysis of the company based on its current free cash flow. I did not take into account any of its growth potentials as to only value the company as if it stops growing today.
I used its most recent free cash flow number of $322 million and, to be conservative, used an investor hurdle rate of 10% as opposed to using a weighted average cost of capital which falls right around 6.3% for discounting purposes. The reason I chose to use an investor hurdle is due to the high amount of debt the company has relative to its current cash position (more on this potential risk below).
I believe the company can continue growing its cashflows by an average of 20% each year but will like not continue growing at the same rate it has in the past. While Discounting its current free cash flow of $322 million by 10% each year for ten years shows the company is currently worth approximately $2.734 billion. If we take $2.734 billion divided by the current number of shares outstanding, we find that the stock is currently fairly valued at its current stock price.
There are two sides of the coin affecting this potential value:
1. The potential risks of being highly levered (more on this below)
2. The likelihood of revenue growth in the future
Both of these factors make finding a fair value difficult which is why I used its current free cash flow and did not account for any future growth. If we factor in future growth, the potential value is astounding.
When looking at other metrics to value the company the same story applies. Their PE ratio is 9.7x, while the industry average is currently 15x. Its price to book ratio at 2.7x is considerably below the industry average of 50.3x. While price to book is not always a fair representation of value especially when considering a financial asset management company, the discrepancy between the industry average on both the price-to-book and price-to-earnings show a meaningful underappreciation from the market.
Based on the discounted cash flow analysis and the discrepancy between current multiples, I believe Victory Capital Holdings is undervalued. When taking a look at the future growth prospects of the company and how it is positioning itself in the shifting financial advisory market, I believe the company presents a decent upside in the following years.
Comparable
Taking a look at one of Victory Capital's competitors, I analyzed BrightSphere Investment Group (BSIG). It has a similar multi-boutique asset manager business model, but beyond the similarities, the two firms produce vastly different results.
Here is a comparison between the two companies' revenue and earnings history. Pay attention to the free cash flows of each company (Victory Capital on the right and BrightSphere on the left).
Source: Simply Wall Street
Victory Capital holdings have consistently increased its revenue year after year while BrightSphere's revenue is trending downward. Cash flows and earnings have been consistent from Victory Capital while those from BrightSphere's have been very volatile.
BrightSphere, however, has received nearly the same interest from investors despite the choppy revenue and earnings history. BrightSphere's cashflows have been trending downward, yet the market cap is nearly identical to Victory Capital's.
BrightSphere's AUM is $114 billion compared to Victory's $162.6 billion under management. The overall picture of Victory Capital is brighter and they have a better track record for growth. I believe the sentiment of Victory Capital Holdings is lagging its current growth and the company is undervalued based on its current and historical financials compared to its competitors in the space.
Risks
There are three main risks to consider before investing in Victory Capital Holdings.
The first is the high level of debt the company has and while the company covers the interest on this debt very effectively with its EBIT, the debt to current cash and equivalents is alarming. The company has $633.897 million in debt and only $66.729 million in cash and cash equivalents. The story is made a little brighter by the company reducing its debt from $1.006 billion in September 2019 to its current debt holding which demonstrates financial strength.
Victory Capital's interest on their debt is also well covered by earnings before interest and taxes (EBIT) at a multiple of 21.8x coverage. The combination of Victory's coverage of its interest on its debt and the fact that the company has paid down nearly 37% of its debt in two years presents a strong counterargument against the overall risk of debt.
The second risk is less of a risk and more of a consideration. Victory Capital has only paid out a dividend for two years. While they've increased their dividend during those two years, it's not enough of history to judge their ability to pay a consistent dividend over time. That being said, the company's payout ratio is a very healthy 11.1% which gives the company a lot of wiggle room for future capital expenditures to further develop its product offering.
Finally, the largest risk to the company is the outflows they've seen from their management platform in 2020. These outflows seem to have stopped for the time being and as of their most recent 10Q, AUM had declined by approximately $2 billion primarily due to market fluctuations. As market volatility is a very common reason for AUM to decline temporarily, it seems Victory Capital Holdings has progressed past its previous AUM outflow problems and has risen $27.2 billion since September of 2020.
Final Thoughts
As the financial advisor landscape evolves to include more SMAs and ETFs, Victory Capital is positioning itself to be a large player in this space. The company has a proven track record of making quality acquisitions to develop its product offerings. Based on the past growth and development, and future prospects of its product offering I believe Victory Capital Holdings has the potential to be a great buy and hold stock for investors.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in VCTR over 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (3)
2) The company currently trades at a market cap of around $2.39B and the share price is equal to $35.06, according to Google Finance. How did you arrive at the share price equal to $121.10, I believe that your share count is wrong. Cheers
Karam
Thanks in advance