AB - AllianceBernstein: EPS Growth Expected Shares Fall To Key Long-Term Support (Rating Upgrade)

2023-10-09 23:51:51 ET

Summary

• Capital markets stocks have suffered in recent years, but AllianceBernstein is expected to report a modest increase in EPS for Q3 and impressive profit growth longer-term.
• AllianceBernstein has a low valuation and a high dividend yield, making it an attractive investment option.
• Analysts predict that AllianceBernstein's earnings will fall this year but will see significant growth in the coming years, with dividends also expected to rise.
• I outline key price levels to watch following a nearly two-year bear market.

Capital markets stocks have suffered over the last two years. Lower stock and bond prices are an obvious headwind to asset managers as dealmaking on Wall Street remains tepid. FactSet notes that the capital markets industry within the Financials sector is expected to be the worst-performing niche (in terms of earnings growth) during this upcoming reporting season.

AllianceBernstein (AB), however, is expected to report a modest YoY increase in EPS. Impressive profit growth is seen thereafter. With improved technicals (shares at support), I am upgrading the stock to a buy from a hold.

Capital Markets A Financials Sector Sore Spot For Q3 Earnings

According to Bank of America Global Research, AllianceBernstein is a financial services firm with a large asset management business in addition to a captive private wealth platform and a sell-side research business. AB is controlled by Equitable Holdings and is organized as a publicly-traded partnership.

The Nashville-based $3.5 billion market cap Asset Management and Custody Banks industry company within the Financials sector trades at a low 13.6 trailing 12-month GAAP price-to-earnings ratio and pays a high 8.4% trailing 12-month dividend yield. Ahead of earnings later this month, shares trade with a moderate implied volatility percentage of 31%, and short interest is modest at just 0.7% as of October 6, 2023.

AB: Yield Hovers Above 8%

Back in July, AB reported $0.61 of operating EPS, missing consensus estimates by a nickel. Revenue was up less than 1% from the same period a year earlier, also falling short of expectations. The firm’s net flows for the quarter were weak at -$4.0 billion and the bottom-line miss was the result of reduced management fees as well as high expenses. Shares fell in response to earnings and continued lower into mid-August.

While assets under management fell 1.4% in August, AllianceBernstein has enjoyed a pair of sell-side upgrades in the last several weeks. First, BofA raised its outlook in early September, making it a top pick, due to an eventual reallocation toward fixed income, something AB specializes in, given the higher interest rate environment. The second bullish call came from Goldman - its analyst is upbeat regarding AB’s ability to grow fees and expand its margins.

On valuation , analysts at BofA see earnings falling more than 10% this year, but then EPS growth returns in the out years. The Bloomberg consensus forecast is not quite as sanguine compared to BofA, but the latest outlook calls for nearly $3 of EPS in 2024 and an acceleration in growth by 2025. Dividends, meanwhile, are seen as rising considerably over the coming quarters, which would further swell what is already an impressive yield.

AllianceBernstein: Earnings, Dividend, Valuation Outlooks

If we assume $3.40 of 2025 EPS and apply the stock’s 5-year average forward operating earnings multiple, then we are talking about a stock that should be in the low $40s. Of course, that is looking ahead many quarters, but it gives you a sense of where shares could go if they simply revert to historical valuations by late next year. For now, pricing shares in the mid-$30s may be appropriate using nearer-term EPS expectations.

AB: Weak Current Valuation Metrics, But EPS Growth Ahead

Compared to its peers , AB features a decent valuation, particularly when you consider the impressive growth outlook (though recent growth has been weak). Profitability is robust with this capital markets company, though I did notice that there have been five EPS downgrades recently, per Seeking Alpha, and no upgrades (despite the slew of sell-side recommendation raises). Share price momentum is below its rivals, too.

Competitor Analysis

Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q3 2023 earnings date of Friday, October 27 AMC. No other volatility catalysts are expected in the near term.

Corporate Event Risk Calendar

The Technical Take

I was neutral on AB for several quarters as shares slid off their highs nearly two years ago. I now see the stock revisiting a key range from before the pandemic. Notice in the chart below that shares should find natural buyers due to high volume by price in the $26 to $32 range. The low from August was just above $29, and though the long-term 200-day moving average is downward-sloped, we have seen a modest uptick in the RSI momentum index (at the top of the graph).

More broadly, the RSI is still confined to the bearish 20 to 60 zone, so a breakout above 60 may portend a later bullish stock price reversal. I see upside resistance near $42 - that's where AB broke down from a bit over a year ago and where sellers emerged in late 2022 and earlier this year. For now, long with a stop under the August low could make sense, or placing a sell-stop order under $26 could allow for more downside (based on the 2019 range lows).

Overall, I recognize the trend remains firmly down, but we have entered a spot where buyers should come about.

AB: Shares Fall To Key Support, $42 Resistance

The Bottom Line

I am upgrading AB stock from a hold to a buy. I see shares as a better value today with EPS growth finally inflecting higher. The chart, meanwhile, suggests that the downtrend could finally be coming to an end.

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