AMG - Affiliated Managers Is No Longer A Buy After Below-Expectations Guidance

2023-07-27 12:22:27 ET

Summary

• Affiliated Managers' Q2 2023 financial performance was mixed; AMG's earnings exceeded expectations, but its revenue was lower than what analysts had forecasted.
• AMG's guidance relating to Q3 2023 EBITDA and full-year FY 2023 performance fee earnings was below expectations, which led to a -12.3% fall in its share price on Wednesday.
• I am lowering my rating for Affiliated Managers to a Hold following an assessment of AMG's outlook for both the short term and the long run.

Elevator Pitch

My investment rating for Affiliated Managers Group, Inc. ( AMG ) stock is a Hold.

Earlier, I touched on AMG's key valuation creation levers in my prior write-up published on April 24, 2023. The focus of my current article for Affiliated Managers is the review of the company's financial performance in the second quarter of this year and its forward-looking guidance.

AMG's performance for Q2 2023 was mixed, considering its below-expectations revenue and above-expectations earnings. Affiliated Managers' financial performance in the near term is expected to be lackluster as evidenced by the company's EBITDA and performance fee earnings guidance. On the flip side, AMG still has levers such as allocating more capital to high-growth areas and portfolio restructuring to support its growth in the long term as per my analysis in the earlier April 24 update. As such, I have decided to downgrade my rating for AMG from a Buy previously to a Hold now, in view of the weaker short-term growth outlook for the company.

The Market's Expectations Of AMG's Q2 Financial Results

The Wall Street analysts' consensus financial estimates for Affiliated Managers prior to its most recent quarterly results announcement on July 26 pointed to AMG delivering positive top-line and bottom-line growth on a QoQ basis in Q2 2023.

In specific terms, the sell-side was expecting Affiliated Managers' revenue to expand by +4.4% QoQ from $517.4 million in Q1 2023 to $540.3 million for Q2 2023. AMG's non-GAAP adjusted earnings per share or EPS was projected to increase by +1.2% QoQ from $4.18 to $4.23 over the same time period based on consensus financial forecasts.

As detailed in the subsequent section, AMG's actual second quarter results were mixed.

Affiliated Managers' Actual Second Quarter Performance Was Mixed

AMG's Q2 2023 normalized EPS surpassed the sell-side analysts' expectations, but the company's second quarter revenue was lower than Wall Street's consensus estimate.

Revenue for Affiliated Managers declined by -0.9% QoQ to $512.5 million in Q2 2023, which turned out to be -5.1% below the sell-side's consensus top-line forecast. AMG's YoY sales contraction for Q2 2023 was -15.2%, and that was worse than the company's Q1 2023 revenue drop of -14.8% YoY.

Affiliated Managers' poor top-line performance for the second quarter of the current year was consistent with the change in the company's Assets Under Management or AUM. AMG's end-of-period AUM increased modestly by +0.9% QoQ from $668.0 billion as of March 31, 2023, to $673.9 billion as of end-Q2 2023, but its average AUM decreased by -8.1% YoY for the most recent quarter.

Separately, AMG saw its normalized EPS grow by +6.5% QoQ and +10.4% YoY to $4.45 for Q2 2023. This also meant that Affiliated Managers' actual second quarter bottom line beat the market's expectations by +5.1%.

At the company's Q2 2023 results briefing on July 26, 2023, Affiliated Managers attributed the company's above-expectations earnings to contributions from "performance fees", and the positive effects of "incremental share repurchases" and "discrete foreign tax benefits."

It is worthy of note that AMG released the company's Q2 2023 results on July 26, 2023, before trading hours, and its share price fell by -12.4% to close at $141.57 on the same day. But Affiliated Managers' mixed Q2 2023 results weren't the key reason for the company's poor stock price performance. It was AMG's below-expectations financial guidance which disappointed investors, as discussed in the next section.

AMG's Management Guidance Was Disappointing

Affiliated Managers noted at its second quarter earnings call that it was expecting to report a normalized EBITDA of $195.0 million for Q3 2023 based on the mid-point of its guidance. At its most recent quarterly results briefing, AMG also shared that it saw its "full year (FY 2023) performance fee earnings" falling "closer to the lower end of that guidance ($125-175 million) range."

AMG's financial guidance implied that the company's non-GAAP adjusted EBITDA was projected to decrease by -11.5% YoY and -9.0% QoQ to $195.0 million in the third quarter of this year. More importantly, Affiliated Managers' Q3 2023 EBITDA guidance of $195.0 million was -13.4% lower than the sell-side's consensus third quarter EBITDA forecast of $225.3 million (source: S&P Capital IQ ).

Also, Affiliated Managers' comments on its fiscal 2023 performance fee guidance would have left investors disappointed. AMG reported $20 million in performance fee earnings for Q2 2023, which was one of the key factors driving the company's bottom line beat in the recent quarter as highlighted in the preceding section. Affiliated Managers also generated performance fee earnings amounting to $25 million in Q1 2023. Assuming that AMG registers $125 million of performance fee earnings in FY 2023 as it guided for, this will represent a significant decline in performance fee earnings as compared to previous years. As a reference, Affiliated Managers' actual performance fee earnings for FY 2021 and FY 2022 were higher at $184 million and $227 million , respectively.

The sole bright spot for AMG in terms of its outlook is that the company raised its FY 2023 share buybacks target from $425 million previously to $500 million now. Share repurchases will help to support Affiliated Managers' EPS to some extent by reducing the company's share count.

Closing Thoughts

Affiliated Managers' near-term outlook is challenging judging by the company's guidance pertaining to performance fee earnings and EBITDA. In my earlier April 24, 2023, update, I emphasized that AMG has the "ability to drive long-term growth through levers such as portfolio optimization and capital allocation", and I remain confident in the company's growth prospects for the long run. Taking into account both AMG's short-term prospects and long-term growth potential, I think that a Hold rating for Affiliated Managers is fair.

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