AMG - Recent Results Reinforce My Positive View Of Affiliated Managers

Summary

• AMG's adjusted AUM grew by a decent +6% QoQ in Q4 2022, excluding the effects of the company's disposal of its interest in a private equity firm.
• The company's Q4 2022 bottom line increased by +19% YoY and came in +3% better than market expectations, due to meaningful share buybacks and significant performance fees.
• I keep my Buy rating for Affiliated Managers Group, as I have a positive view of AMG's intermediate term outlook after considering the favorable change in its earnings mix.

Elevator Pitch

I continue to assign a Buy rating to Affiliated Managers Group, Inc.'s (AMG) stock.

I looked at how AMG could be a potential beneficiary of "a resurgence of active investing" with my earlier write-up for Affiliated Managers Group published on October 18, 2022. AMG's share price has gone up by +31.5% (source: Seeking Alpha price data) since my previous article was written, while the S&P 500 declined by -0.8% in the same period.

In this current article, I turn my attention to the review of AMG's Q4 2022 financial results that were recently announced on February 6, 2023 before the market opened. Affiliated Managers' fourth quarter earnings beat market expectations, and the company's growth prospects are reasonably good taking into account the increase in its EBITDA contribution from areas offering higher growth potential.

AUM Growth Was Better Than What Headline Numbers Suggested

Affiliated Managers Group's reported assets under management or AUM increased by +1% from $644.6 billion as of the end of the third quarter of the previous year to $650.8 billion at the end of 2022.

On March 16, 2022, Seeking Alpha News reported that AMG divested its "minority interest in BPEA (Baring Private Equity Asia) to EQT." Affiliated Managers Group's AUM was reduced as a result of this specific transaction.

If one adjusts for the effects of AMG's sales of its stake in BPEA, Affiliated Managers Group would have delivered a reasonably good +6% QoQ AUM expansion in the most recent quarter.

The outlook for Affiliated Managers Group's short term AUM growth is positive taking into account management commentary at the recent quarterly results briefing. At its Q4 2022 earnings call on February 6, AMG disclosed that its "current AUM levels" were "up 6% quarter-to-date" up till February 3, 2023.

Q4 2022 Earnings Beat

Affiliated Managers Group achieved better than expected bottom line growth in the most recent quarter.

Normalized earnings per share or EPS for AMG grew by +73% QoQ and +19% YoY to $7.28 in the final quarter of the prior year. The company's actual Q4 2022 normalized EPS turned out to be +3% higher than Wall Street analysts' consensus bottom line forecast of $7.04 per share.

Significant performance fees and a reduction in the company's share count via buybacks were the major drivers of Affiliated Managers Group's Q4 2022 earnings beat.

AMG's non-GAAP EBITDA increased by +69% QoQ from $220 million in the third quarter of 2022 to $371 million for Q4 2022. Notably, operating income contributed by performance fees amounting to $188 million made up as much as half of Affiliated Managers Group's fourth quarter EBITDA as highlighted by management at its Q4 2022 earnings briefing.

Separately, Affiliated Managers Group managed to grow its normalized EPS to a larger extent as compared to its non-GAAP net profit as a result of the company's aggressive share repurchases. AMG's normalized net income increased by +12% YoY from $255 million in Q4 2021 to $285 million for Q4 2022, but its non-GAAP adjusted EPS rose by +19% YoY in the same time frame. This was achievable, because AMG's share buybacks drove a -6% decline in the company's shares outstanding from 41.8 million as of end-2021 to 39.2 million as of end-2022.

Favorable Change In Operating Earnings Mix

In the company's Q4 2022 financial results presentation slides , AMG highlighted that the company currently generates over half of its EBITDA from "high-growth areas" with "secular demand" such as "private markets, liquid alternatives, dedicated ESG (Environment, Social & Governance), and wealth management."

Affiliated Managers Group disclosed at the recent Goldman Sachs ( GS ) U.S. Financial Services Conference on December 6, 2022 that secular growth areas only contributed around a quarter of the company's EBITDA a couple of years ago. This implies that AMG has been actively optimizing its operating income mix in recent years, and this should eventually result in a stronger earnings growth profile for the company in the future.

Looking forward, AMG revealed at the early-December 2022 GS investor event that the company's goal is to increase its EBITDA contribution from secular growth areas to as high as 67% in the medium term. Notably, Affiliated Managers Group indicated at its most recent quarterly earnings briefing that it could potentially allocate more excess capital to investments as opposed to share repurchases in 2023. This sends a clear message to investors that AMG is embarking on a new phase of accelerated growth.

The market doesn't seem to have given Affiliated Managers Group sufficient credit for its above expectations fourth quarter financial performance and its favorable mid-term growth outlook. AMG is now valued by the market at a consensus forward next twelve months' EV/EBITDA multiple of 9.7 times, which is -13% lower than its 15-year mean EV/EBITDA multiple of 11.2 times.

Closing Thoughts

My Buy rating for AMG stays intact. Affiliated Managers Group deserves to trade at a higher EV/EBITDA valuation multiple based on its better than expected Q4 bottom line and the positive intermediate term outlook for the company.

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