CNS - Cohen & Steers: A Mixed Quarter

Summary

• Cohen & Steers' actual third-quarter topline of $140 million exceeded the analysts' consensus estimate by +3.2%.
• But CNS didn't manage to beat market expectations with its Q3 2022 adjusted EPS of $0.92, due to a larger-than-expected contraction in its operating profit margin.
• My investment rating for CNS stays as a Hold, considering that Q3 2022 was a mixed quarter.

Elevator Pitch

I rate Cohen & Steers, Inc.'s ( CNS ) shares as a Hold.

In my prior article for CNS published on August 8, 2022, I reviewed Cohen & Steers' financial performance for the second quarter of 2022. I highlighted in the earlier update that positives relating to the company's Q2 earnings beat have been factored into its stock price. As such, it isn't a major surprise that Cohen & Steers' share price has dropped by -22.9% since I wrote my previous article.

The focus of this latest article is Cohen & Steers' recently announced Q3 2022 financial results. CNS's third-quarter earnings met the market's expectations, but I think it was a mixed quarter for the stock. On the positive side of things, Cohen & Steers delivered a revenue beat, as its strategies relating to real assets were favored by investors in an inflationary environment. On the negative side of things, CNS's operating profit margin declined by a significant -280 basis points YoY as a result of increased investments and negative operating leverage. In view of CNS's Q3 2022 performance, I have decided to retain a Hold rating for the company's shares.

Muted Market Reaction To CNS's In-line Earnings

Cohen & Steers announced its Q3 2022 results on October 19, 2022 after the market closed. Investors' reaction to CNS's third-quarter results has been muted; Cohen & Steers' last traded stock price of $57.85 as of October 21, 2022 is just +0.3% higher than its last share price of $57.68 at the end of the October 19, 2022 trading day.

In fact, the market's response to CNS's Q3 2022 results announcement is reflective of how the company has performed in the recent quarter. Cohen & Steers' actual third-quarter non-GAAP adjusted earnings per share or EPS of $0.92 is the same as what Wall Street analysts had forecasted prior to the company's results release last week. In other words, CNS hasn't gotten investors excited with its Q3 2022 financial performance, but the company didn't disappoint the market with its recent quarterly earnings as well.

In the subsequent sections of the current article, I will touch on a number of CNS's key financial metrics.

Topline And Assets Under Management

Cohen & Steers' Q3 2022 revenue contracted by -9.2% YoY and -5.1% QoQ to $140 million in the third quarter of this year. CNS's topline decline in the recent quarter is consistent with the -9.9% QoQ decrease in the company's Assets Under Management or AUM to $79.2 billion as of end-Q3 2022.

Weak market conditions were the key factor that contributed to the drop in CNS's AUM and revenue in Q3 2022. Specifically, Cohen & Steers' AUM decreased by -$8.7 billion in absolute terms between June 30, 2022 and September 30, 2022. CNS noted in its Q3 earnings press release that "market depreciation of $7.4 billion" accounted for about 85% of its AUM contraction in the recent quarter.

However, it must be noted that Cohen & Steers' actual topline for the third quarter was +3.2% above the sell-side analysts' consensus revenue projection of $135.6 million. In my early-August 2022 article for CNS, I mentioned that Cohen & Steers has benefited from the increased "demand for exposure to real assets to counter inflation" due to its "focus on real assets." I think this explains why Cohen & Steers' Q3 2022 revenue was better than what the market had expected.

CNS's above-expectations revenue didn't translate into an earnings beat, as I will explain in the next section.

Profit Margins

Cohen & Steers' bottom line for the recent quarter was in line with investors' expectations, as I indicated earlier in this article. But CNS didn't manage to achieve an EPS beat even though it delivered higher-than-expected revenue, because the company suffered from meaningful margin compression.

The non-GAAP adjusted operating profit margin for CNS narrowed by -2.8 percentage points YoY and -0.5 percentage points QoQ to 42.8% in the third quarter of the current year.

One reason for Cohen & Steers' operating margin contraction in Q3 is negative operating leverage. Similar to most asset management companies, CNS has a reasonably high proportion of fixed costs that don't vary with revenue. As a result, a decline in Cohen & Steers' topline has an outsized impact on its bottom line.

Another reason is that CNS has been investing in new growth initiatives. Cohen & Steers emphasized at its recent Q3 2022 earnings briefing on October 20, 2022 that "new strategies, new capabilities such as private real estate" are a "driver of our need for talent."

I noted in my previous August 8, 2022 update for Cohen & Steers that "inflows for the non-traded REIT market more than tripled" last year, which supports CNS's move to grow in the private real estate space. However, there could be more short-term pain in the form of depressed operating profit margins, before investors can enjoy the long-term benefits associated with the new private real estate growth driver.

Concluding Thoughts

I keep my Hold rating for Cohen & Steers unchanged. Q3 2022 was a mixed quarter for CNS, which justifies my decision to maintain a Hold rating for the stock. Cohen & Steers' topline contraction wasn't as bad as the market feared, but the company's lower-than-expected operating margins meant that it wasn't able to achieve an earnings beat.

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