KCE - Cohen & Steers: Eyeing Weak AUM Trends CRE Exposure A Risk Ahead Of Earnings

2023-04-16 04:06:46 ET

Summary

• Earnings season steps up this week, and a strong EPS beat rate so far is an encouraging sign.
• There are pessimistic trends, though, with Cohen & Steers as commercial real estate risks rise.
• Still, lower interest rates and improving equity markets are tailwinds for the asset manager.
• With expensive options ahead of its Q1 report, I spot the key price levels to watch.

The S&P 500 EPS beat rate has been impressive so far. According to John Butters at FactSet , 90% of companies have topped analysts’ earnings forecasts. Of course, just 6% of the index has reported. This week is when things really ramp up.

I see risks with Cohen & Steers ( CNS ), but much of the dour fundamentals are priced in. The onus is now on the bulls to turn things around. I'm a hold on the stock for now.

Earnings Season Kicks Into High Gear This Week

According to CFRA Research, Cohen & Steers, Inc. is a publicly owned asset management holding company. Through its subsidiaries, the firm provides its services to institutional investors, including pension funds, endowments, and foundations. It manages separate client-focused equity, fixed income, multi-asset, and commodity portfolios through its subsidiaries.

The New York-based $3.0 billion market cap Capital Markets industry company within the Financials sector trades at a near-market 17.5 trailing 12-month GAAP price-to-earnings ratio and pays a high 3.8% dividend yield, according to The Wall Street Journal.

Back in January, the company reported $0.79 of per-share profits, which was a miss by two pennies. Revenue fell 22% YoY, but that was a modest beat relative to expectations. Still, bearish trends in AUM plague the asset manager. Lower market values and net outflows is a recipe for a weak stock price. In all, Q4 outflows totaled $1.1 billion. Total AUM stood at $79.9 billion as of March, down from more than $106 billion during Q4 2021 .

Cohen & Steers: AUM Under Pressure

But with rebounding stock and bond markets lately, there should be some tailwinds, though the onus is on CNS’s management to stem the outflow trend. Another upside catalyst is the decline in interest rates – helping the firm’s large REIT portfolio. A major risk, though, is a bearish outlook for the commercial real estate market and financing firms, such as Cohen and Steers, that rely on that market.

On valuation , earnings are seen as falling more than 8% this year before per-share profits rebound in 2024. Earnings are still seen as being below the peak from 2021. The sales trend is also lackluster with sequential revenue drops dating back to Q1 2022, per CFRA.

CNS trades 8.7 times book value relative to its 5-year historical average of 12.45, a 30% discount while its forward P/E is stretched at 19x versus a 5-year average of 22.3, per Morningstar. Given the lean earnings outlook, a valuation premium to the market is not warranted. I see shares near fair value if we assume a market P/E.

Cohen & Steers: Earnings Outlook & Key Profitability Ratios

CNS: Not A Bargain

Looking ahead, corporate event data provided by Wall Street Horizon show a confirmed Q1 2023 earnings date of Wednesday, April 19 AMC with a conference call later that morning. You can listen live here . The firm also hosts its annual shareholder meeting on May 4 before its monthly AUM report on May 11.

Corporate Event Risk Calendar

The Options Angle

Digging into the upcoming earnings report, data from Option Research & Technology Services (ORATS) show a consensus EPS forecast of $0.72 which would be a 31% decline from $1.04 of per-share profits earned in the same period a year ago. It would be the 5 th consecutive sequential earnings drop. The bulls can point to CNS topping estimates in the previous 11 reports, but the bears will counter with a trend of four straight negative stock price reactions post-earnings (and after seven of the last eight).

This time around, the options market has priced in a large 6.6% earnings-related stock price swing when analyzing the at-the-money straddle expiring soonest after the upcoming reporting date. That premium is expensive compared to historical realized moves, so I am inclined to sell options heading into Wednesday.

CNS: Sell Premium Into Earnings, Expecting an EPS Beat

The Technical Take

With shares trading near fair value amid a mixed macro picture for CNS, the technicals are not ideal. Notice in the chart below that shares broke out from a downtrend resistance line off the late 2021 peak earlier this year, but the stock met selling pressure at the key $78 to $80 range. Since that February peak, CNS has plunged nearly 25%. The overall drawdown off the $101 high nearly got to 50%. Is the worst over? It doesn’t look like it.

I see high volume lately as the stock has fallen back near the weakest level since November last year. With a bearish death cross between the 50-day and 200-day moving averages, and the latter long-term trend indicator continuing to move lower, the bears are in control. Buying on a move toward the low to mid-$50s is a better risk/reward play here, or waiting for a trend breakout above $80 could work. Selling $60 strike call options might be a decent short-run bet.

CNS: A Persistent Downtrend, Bears In Charge

The Bottom Line

I am a hold on CNS stock. The valuation is more compelling today, but it is still not a steal. Also, ahead of earnings, the technicals are soft. Buying in the low to mid-$50s is a better technical and fundamental play while momentum traders should wait for a breakout above $80.

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