CA - Power Corporation of Canada: A Retirement-Oriented Financial Stock For Retirees

2023-10-07 04:42:16 ET

Summary

• Power Corp achieved Q2'23 revenues of $10.43bn, a 2.84% YoY increase, but experienced a decline in net income and free cash flow.
• The company focuses on macro tailwinds and executes a growth strategy through organic and inorganic growth and higher-level synergies.
• Power Corp is undervalued according to discounted cash flow analysis and intrinsic valuation, and it sees multi-sided growth through acquisitions.

The Power Corporation of Canada (PWCDF) is a Montreal, Quebec-based management and holding company which focuses on a multinational distribution of financial services across the insurance, retirement, wealth management, and investment management verticals.

Introduction

As a holistic financial company, Power Corp is influenced by and therefore centres their strategy around macro tailwinds and headwinds in the financial sector. For instance, as the Fed target rate rises, Power Corp has adjusted its position to reduce focus on leverage and simultaneously reduce the cost of capital.

Despite macro headwinds, Power Corp has continued executing their tripartite growth strategy, with a broad-based plan surrounding organic and inorganic growth alongside higher-level synergies at the conglomerate level. For instance, with a presence across the financial services pipeline, Power Corp is effectively able to source capital across all platforms, utilize a diverse but focused talent pool, and enable superior demand-side relationships with individual and institutional clients.

As such, the combined value of the latter strategy, alongside Power Corp's moderate undervaluation on a net present value and net asset value basis, led me to rate the stock a 'buy'.

Valuation & Financials

Past Year Price Action & Q2 Results

In the TTM period, Power Corp's stock- up 3.14%- has experienced poorer price action to both TradingView's Insurance Index- up 7.94%- and the broader market, as represented by the S&P500 ( SPY )- up 12.35%.

While the general insurance industry- which Power Corp is most analogous to has underperformed due to the declining value of their presently held bonds, Power Corp has seen particularly poor price action as convergent interest rate and inflationary pressures squeeze retail consumers and put retirement concerns- with Power Corp's non-insurance retirement products at the forefront of the company's growth objectives- at the backburner.

With this in mind, in Q2'23, Power Corp achieved revenues of $10.43bn- an increase of 2.84% YoY, alongside a net income of $514.00mn- a 4.81% decline- and a free cash flow of $678.00mn- a 76.87% decline largely driven by reduced operating cash flows.

To add context, in 2022 as a whole, Power Corp achieved revenues amounting to $72.65bn in addition to a $1.97bn net income and free cash flow of $6.70bn.

Power Corp Remains Undervalued

According to my discounted cash flow analysis, at its base case, the net present value of Power Corp is $37.70, meaning, at its current price of $34.24, the stock is currently undervalued by 9%.

My model, calculated over 5 years without perpetual growth built-in, assumes a discount rate of 9%, balancing the company's lower equity risk and its debt-heavy cap structure. Additionally, to remain conservative, I estimated a 5-year forward average revenue growth rate of 6%, lower than the trailing 5-year average of 9.75%, with my projections diminished due to higher interest expenses and general recessionary pressures.

Alpha Spread's intrinsic valuation tool, which averages Alpha Spread's in-house discounted cash flow and relative valuation, corroborates my thesis on Power Corp's undervaluation, estimating an intrinsic value of $40.74, a 16% undervaluation.

Thus, averaging out my DCF and Alpha Spread's intrinsic value, the fair value of Power Corp is $37.49, a 12.5% undervaluation.

Even on a net asset value basis Power Corp remains fundamentally undervalued with per share NAV at $48.86 as of the end of Q2'23, compared to $46.89 at the end of Q1'23.

Power Corporation Sees Multi-Sided Growth - Driven by Acquisitions- Which May Translate to Dividend Inclines

Central to Power Corp's success remains its integration into the consumer financial lifecycle, with its ingrained traditional insurance businesses, personal financial wellness tools, mutual fund segments, etc. all supporting its synergetic expansion of the 'Empower' retirement business, which has established itself as the second largest US retirement services provider. By providing a diverse range of financial services, Power Corp's Empower segment is able to effectively cross-sell services and lock in consumers across high-margin products for years to come.

In parallel with this, Power Corp has aggressively focused on the secular expansion of the margin-expanding segments of wealth management and asset management, with its rapidly growing digital broker, Wealthsimple, at the centre of this strategy. Additionally, Power Corp has moved to acquire a 20.5% interest in Rockefeller Capital Management alongside an expanded footprint in ChinaAMC, increasing capital market access and synergistic benefits across the board.

The latter strategic focus has enabled Power Corp to support its $680mn quarterly dividend, alongside an opportunistic share repurchase program and fortress financial position. The company's well-informed capital deployment strategy thus empowers investors for long-run income-driven value alongside gradual, accretive share price growth.

Therefore, by offering a strong dividend opportunity in congruence with the low overall beta, retirees can rest easy knowing that they have secured a solid risk-adjusted income stock, not as prone to volatility- especially concerning interest rate-driven volatility- and at a discount too.

Wall Street Consensus

Analysts generally echo my positive view on the stock, estimating an average 1Y price target of $42.36, a 23.85% increase.

Even at the minimum projected price target of $40.00, analysts see a price incline of 16.96%.

I believe this reflects Wall Street's opinion on the operational strength of Power Corp and its unfair mischaracterization as exclusively an insurance company by the rest of the market.

Risks & Challenges

Persistent Interest Rates May Reduce Financing Capabilities & Relative Value of Income Stocks

While Power Corp may see a more unmanageable expense base due to its higher debt levels and rising interest rates, the company's demand-side growth is just as sensitive. The cost of capital rises not just for any of Power Corp's institutional clients, but retail consumers as well, who may cut long-run savings and retirement plans to fulfill short-term needs. As such, sticky interest rates may compress the supply of capital and the demand for Power Corp's services in the long run.

Diverse Revenue Base May Compress Growth Capabilities

While the suite of financial products Power Corp offers is core to its macro strategy, its expansive growth across these different segments introduces the company to additional regulatory complexities and to a greater range of third-party risks. As such, especially in the higher rate environment in which the company finds itself, growth in different verticals may expose the company to different risk profiles.

Conclusion

Looking forward, Power Corp's safer income disposition and strategic growth make it the ideal dividend/growth hybrid pick for long-term investors.

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