AMG - Affiliated Managers Group: Watch Out For Positive Surprises

2023-12-18 01:22:52 ET

Summary

• The expectations relating to AMG's future financial performance are reasonably low, so earnings beats in the coming quarters are likely to help to re-rate the stock.
• Affiliated Managers' shares are undervalued based on a comparison of its P/E multiple with its key financial metrics such as earnings growth and ROE.
• I retain a Buy rating for AMG, considering potential earnings surprises that could drive up the company's share price in the future.

Elevator Pitch

I have a Buy investment rating for Affiliated Managers Group, Inc. ( AMG ) stock.

AMG's shares have gone up by +19.3% (source: Seeking Alpha price data) since I upgraded my rating for the stock to a Buy in my prior October 6, 2023 update , which outperformed the S&P 500's +11.5% rise in the same time period.

I take the view that Affiliated Managers' future earnings might surprise investors and analysts in a positive fashion. AMG's current valuations are undemanding, which implies such potential surprises aren't priced into the company's shares yet. Therefore, I remain bullish on Affiliated Managers with a Buy rating.

The Market Has Modest Expectations Of AMG's Future Performance

The analysts' expectations of Affiliated Managers' future financial performance are low, and this leaves lots of room for AMG to surprise the market with better-than-expected results.

A recent December 6, 2023, Seeking Alpha News article cited Goldman Sachs' ( GS ) research indicating that the investment bank's current fiscal 2024 bottom line forecast for AMG is +5% higher than the market's consensus normalized earnings per share or EPS projection. Although there is no assurance that GS' financial estimates for Affiliated Managers will be more accurate than those of the other analysts, this does send a signal that the majority of analysts covering the stock could potentially be too conservative.

A review of Affiliated Managers' history of earnings surprises and the recent changes to the consensus numbers for the stock suggests that the market in general seems to be underestimating AMG's earnings growth potential. Affiliated Managers' quarterly earnings for the first three quarters of the current fiscal year came in above the sell side's expectations, which include a significant +9% bottom line beat for the recent Q3 2023. Notwithstanding the company's track record of earnings beats, the analysts' consensus FY 2024 normalized EPS projection for AMG was revised downwards by -0.6% in the past three months.

In my view, AMG has the potential to surprise investors in a positive way with an above-expectations bottom line performance for the coming fiscal year. In specific terms, Affiliated Managers' performance fee earnings could be a key growth driver for the company.

At the recent Goldman Sachs Financial Services Conference on December 5, AMG guided for $150 million in performance fee earnings for full-year FY 2023, which it deemed to be "a pretty good sort of run rate" for "a rolling 3-year cycle." In contrast, the mean yearly performance fee earnings for the company in the past decade was lower at $117 million as revealed in its investor presentation slides . In other words, AMG anticipates a +28% increase in its annual performance fee earnings from its 10-year historical average of $117 million to $115 million for the FY 2023-2025 period.

The downside risks for Affiliated Managers' future performance fee earnings are limited. The company indicated in its investor presentation that approximately 75% of its performance fee-eligible AUM is in investment mandates that have little or "negative correlation to public (market) beta."

With respect to the upside in performance fee earnings, Affiliated Managers stressed at the Goldman Sachs Financial Services Conference that "we tend to align ourselves with forward carry opportunities as these businesses raise capital" with its private markets investments, which translates into stronger "performance fee earnings capabilities" in the next "2, 3, 4 years." This implies that a shift in performance fee-eligible AUM towards the faster-growing private markets asset category enhances AMG's future performance fee earnings.

In a nutshell, I see Affiliated Managers' shares rising in the future, as its actual bottom line in subsequent quarters and years beat expectations as a result of higher performance fee earnings.

Spotlight On Share Buybacks And Valuation Multiples

Earlier in November 2023, Affiliated Managers revealed that it still has "5 million shares (equivalent to over $750 million based on its last traded share price) available for repurchase under the Company's share repurchase programs." In the first nine months of this year, AMG has executed $441 million worth of share buybacks, and this represents a meaningful 8.5% of the company's market capitalization.

As per AMG's management commentary at the latest Goldman Sachs Financial Services Conference, Affiliated Managers thinks that the market is now offering the company "an opportunity" to "return substantial capital to shareholders" at a "multiple that we don't think reflects the long-term fair value of the business."

The market is now valuing AMG at 7.9 times (source: S&P Capital IQ ) consensus forward P/E. Affiliated Managers' key financial metrics suggest that the stock is deserving of a higher P/E ratio. The company's consensus forward FY 2023 and FY 2024 ROEs are 16.0% and 14.5%, respectively. AMG's bottom line is expected to grow by +9.8% and +16.0% for FY 2024 and FY 2025, respectively. Taking into account the company's mid-teens percentage ROEs and its high single-digit to mid-teens earnings growth rates, AMG can command a P/E multiple of 10 times or higher in my opinion.

To sum things up, AMG's shares are below fair valuations, and the company has the ability to create value for its shareholders by engaging in value-accretive buybacks at current price levels.

Closing Thoughts

I maintain my Buy rating for Affiliated Managers. I deem AMG's shares to be trading at below fair valuation, and I see positive earnings surprises as the catalyst to re-rate the stock.

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