Creating Wealth By Managing Wealth

Includes: AMG, BEN, TROW
by: Paul Price

When hiring a company to handle your money, it's nice to know they have done well managing themselves. Three publicly-traded asset management firms that pass that test are T. Rowe Price (NASDAQ:TROW), Franklin Resources (NYSE:BEN) and Affiliated Managers Group (NYSE:AMG).

The first two of those run the well-known, T. Rowe Price and Franklin-Templeton mutual fund families, respectively. Affiliated Managers Group has joined together multiple boutique asset managers via numerous acquisitions since their 1997 IPO.

How well did they do for their shareholders, as opposed to those who bought their products?

TROW showed the best stock action, while AMG shares more than doubled the percentage growth shown in their actual EPS. BEN did well for shareholders, but the stock did underperform the company's outstanding earnings results.

How was that possible? It's a function of changes in P/E multiples from 2002 to the present. Here are the starting and ending P/Es for the stocks of these fine money management companies.

The takeaways?

T. Rowe Price and Affiliated Managers Group started out (the past decade) at discounts to their long-term normalized valuations. AMG's strong share price performance was supercharged by a 67.5% P/E expansion. It now looks quite expensive. BEN did well in spite of a significant multiple contraction to its very reasonable 13x present day P/E.

That makes Franklin Resources the bargain of this trio.

Here are my 16-month price targets based on Value Line's estimates for 2013 and a regression to normalized P/Es.

TROW: 21 x $3.60 = $75.60 target price = 23.1% above the Aug. 30, 2012 close

BEN: 17 x $9.50 (FY ending Sep. 30, 2013) = $161.50 target = 38.2% above the Aug. 30, 2012 close

AMG: 26 x $3.55 = $92.30 goal = (-21.2%) below the Aug. 30, 2012 close

This is a high-beta, market sensitive industry group. If you like the concept, but feel bearish, you'll want to put these ideas on the back burner waiting for a big pullback. The juicy decade-long gains noted earlier all began during a depressed market period in 2002.

The individual stock charts illustrate the incredible buying opportunities that presented again at the tail end of the 2008-09 bear market.

I bought BEN in late 2008 and again last fall under $90. I continue to hold it today. A short-term rally to $130 or better might tempt me to take a profit.

The Trade: Buy 100 Franklin Resources at $116.84.

Disclosure: I am long BEN. 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.