AMG - Affiliated Managers Group: Recent Pullback Offers Buying Opportunity

2023-04-24 13:17:18 ET

Summary

• Affiliated Managers Group, Inc.'s shares have pulled back significantly in recent months, and its current valuation multiples are below their long-term historical averages.
• Affiliated Managers Group's stock price should eventually recover, when the market has a better appreciation of the company's ability to drive long-term growth through levers such as portfolio optimization and capital allocation.
• I am keeping my Buy rating for Affiliated Managers Group unchanged, as I view the recent correction in its shares as a good "buy on the dip" opportunity.

Elevator Pitch

My Buy rating for Affiliated Managers Group, Inc. ( AMG ) shares remains intact. I previously reviewed AMG's Q4 2022 earnings with my February 7, 2023 article . In this latest update, I highlight that the recent share price correction for Affiliated Managers Group is a buying opportunity considering the stock's undemanding valuations and the company's growth expectations for the long run. As such, I continue to rate AMG as a Buy.

AMG's Stock Price Correction And Valuation Multiple De-Rating

In 2023 thus far, AMG's shares have underperformed in both absolute and relative terms. Affiliated Managers Group's stock price dropped by -11.0% year-to-date, while the S&P 500 (SP500) rose by +8.1% in the same time frame.

Affiliated Managers Group's 2023 Year-To-Date Share Price Performance

AMG's shares actually tracked the broader market for the early part of this year, before the stock's underperformance got substantially worse in early March 2023 as per the chart presented above. Specifically, Affiliated Managers Group's stock suffered from declines of -3.3%, -5.1%, and -4.9% on March 9, March 10, and March 13, respectively. On March 9, 2023, Seeking Alpha News published an article mentioning that "venture capital investors are moving their money out of the troubled Silicon Valley Bank."

As such, it is reasonable to come to the conclusion that Affiliated Managers Group's recent share price weakness is largely attributable to financial markets volatility driven by the failure of Silicon Valley Bank. As an asset management company, it is inevitable that AMG might potentially be hit by massive fund outflows in the short term, assuming that the banking crisis gets out of hand, leading to a severe downturn in financial markets.

AMG's stock price correction has also led to a substantial de-rating of its valuations. Affiliated Managers Group currently trades at 7.5 times and 8.7 times consensus forward next twelve months' normalized P/E and EV/EBITDA, respectively, based on valuation data sourced from S&P Capital IQ . As a comparison, the 10-year average P/E and EV/EBITDA valuation multiples for AMG were higher at 10.7 times and 10.6 times, respectively.

In my opinion, Affiliated Managers Group will eventually benefit from a positive re-rating of its stock price and valuations, when the market looks beyond short-term headwinds for the asset management industry and focuses on AMG's favorable long-term outlook. Specifically, I view portfolio optimization and capital allocation as the two key drivers of value creation for Affiliated Managers Group in the long run, which are discussed in detail in the next section of this article.

Portfolio Optimization And Capital Allocation Are The Key Levers For Value Creation

Affiliated Managers Group noted at the earlier Credit Suisse Group ( CS ) Financial Services Forum on February 14, 2023, that "growth areas" like liquid alternatives, private markets, wealth management, and ESG (Environmental, Social And Governance) have the potential to be "more like 60%" or "two thirds of our business over time" versus around 50% now in terms of operating income contribution.

AMG has shifted its portfolio mix towards new growth areas in the past few years, and there is room for the company's portfolio to be even more growth-oriented going forward.

The percentage of AMG's total operating profit contributed by alternatives (including liquid alternatives and illiquid alternatives like private markets) grew from 33% as of end-FY 2019 to 48% by December 31, 2022, as disclosed in its Q4 2022 results presentation slides . At the CS Financial Services Forum, Affiliated Managers Group credited the growth in operating earnings contribution from alternatives to the $1.3 billion of capital invested in new growth areas for the past four years, of which around 67% is allocated to alternatives. The remaining 33% of the $1.3 billion allocated to capital investment was spent in the area of ESG, another key area of growth for the asset management industry.

Moving forward, there are two key factors that explain why Affiliated Managers Group has the capacity to increase the amount of capital it allocates to growth investments.

Firstly, AMG's capital allocation in the last couple of years wasn't balanced, and there is an opportunity to fix that. In the past four years, Affiliated Managers Group spent roughly $1.3 billion on capital investment as mentioned earlier, but it allocated a larger sum of capital, or $1.9 billion to be specific, to share repurchases during this same period. In other words, AMG's split between capital return and capital investment was more like 40-60 in the past.

AMG guided at the CS Financial Services Forum in mid-February this year that "our goal is to do more than half our capital in growth investments." This implies that Affiliated Managers Group's future capital allocation approach will be more balanced, with at least 50% of its capital allocated to investing in new growth areas as opposed to returning capital to its shareholders.

Secondly, Affiliated Managers Group has the balance sheet and liquidity to support an increase in financial leverage, assuming that AMG identifies good opportunities to deploy capital in new growth areas. At the Bank of America ( BAC ) Securities Financial Services Conference on February 15, 2023, AMG disclosed that it already has "$400 million of capital earmarked for growth investment" in 2023 which assumes that the company doesn't make use of its $1.25 billion revolver credit facility and increases its financial leverage. If AMG chooses to leverage up, the company will have a greater war chest to capitalize on new growth opportunities.

In a nutshell, I am confident that AMG can grow its proportion of operating income derived from "growth areas" from 50% currently to 60% or even higher in time to come based on the factors discussed above.

Concluding Thoughts

I retain a Buy rating for Affiliated Managers Group, Inc. AMG's shares should eventually command a higher valuation multiples, as the company's exposure to growing segments of the asset management industry increases over time.

For further details see: