SEIC - SEI Investments Produces Flat Revenue But Strong Free Cash Flow

2023-12-20 15:59:40 ET

Summary

• SEI Investments Company provides wealth management and advisory services to institutions and advisors.
• The global market for wealth management services is expected to reach $3.43 trillion by 2030, driven by increasing retiree population and demand for alternative investments.
• SEI Investments Company has produced flat revenue growth but strong free cash flow.
• Given the possible full valuation of the stock, my near-term outlook for SEI Investments Company stock is Neutral [Hold].

A Quick Take On SEI Investments

SEI Investments Company ( SEIC ) provides a range of wealth management, advisory and related services to institutions and individuals.

Top line revenue growth has been quite low for SEI Investments Company, with stable profits and very strong free cash flow.

However, due to the currently elevated market valuation of the stock, my outlook on SEIC is Neutral [Hold].

SEI Investments Overview And Market

Oaks, Pennsylvania-based SEI Investments Company was founded in 1968 to provide a broad array of financial and advisory services in the United States.

The firm is headed by Chief Executive Officer Mr. Ryan Hicke, who was appointed to the CEO position in 2022 after being with the company for 24 years and previously led the firm’s U.K. Asset Management and Private Banking businesses.

The company’s primary offerings include the following:

• Wealth management

• Retirement and investment solutions

• Asset management and administration

• Investment processing outsourcing

• Financial services

• Investment advisory services.

SEI acquires customers through its direct efforts as well as through financial product distributors and other market participants.

According to a 2023 market research report by Allied Market Research, the global market for wealth management services was an estimated $1.25 trillion in 2020 and is expected to reach $3.43 trillion by 2030.

This represents a forecast CAGR (Compound Annual Growth Rate) of 10.7% from 2021 to 2030.

The main drivers for this expected growth are an increasing retiree population, growing wealth of high-net-worth individuals and increasing demand for alternative investments providing adequate yield opportunities.

Also, aspects that could negatively impact the wealth management industry include the rise of Fintech firms seeking to automate services and increasing usage of passive investing techniques.

North America was the largest region, followed by Western Europe, the Asia Pacific region, and others. Notably, the Western Europe region is expected to grow the fastest, followed closely by the Asia Pacific region.

Major competitive or other industry participants include:

• Private equity funds

• Specialized investment funds

• Commercial banks

• Other BDCs

• REITs.

SEI Investments’ Recent Financial Trends

Total revenue by quarter (blue columns) has risen only slightly sequentially due to a "challenging market environment"; Operating income by quarter (red line) was flat in Q3 due in part to a one-time expense from a voluntary separation program.

Gross profit margin by quarter (green line) has meandered with no discernible trend; Selling and G&A expenses as a percentage of total revenue by quarter (amber line) have remained flat in recent quarters:

Earnings per share (Diluted) have also flattened in recent quarters:

(All data in the above charts is GAAP.)

In the past 12 months, SEIC’s stock price has risen by 11.75% vs. that of Pacer WealthShield ETF's (PWS) drop of 4.36%:

For balance sheet results, the firm ended the quarter with $887.2 million in cash, equivalents and short-term investments and no debt.

Over the trailing twelve months, free cash flow was an impressive $453.6 million, during which capital expenditures were $30.0 million. The company paid $31.5 million in stock-based compensation in the last four quarters.

Valuation And Other Metrics For SEI Investments

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha.)

Below is an estimated DCF (Discounted Cash Flow) analysis of the firm’s projected growth and earnings:

Based on the DCF, using a discount rate of 10% (10-year Treasury (US10Y) at 4% plus 6% equity risk premium) and forward earnings per share assumption of $3.71, the firm’s shares would be valued at approximately $53.36 versus the current price of $64.58, indicating they are potentially currently overvalued by about 21%.

Commentary On SEI Investments

In its most recent earnings call (Source - Seeking Alpha ), management’s prepared remarks highlighted its sales efforts among investment managers, regional and community banks, UK private client investment managers and larger RIAs.

The company plans to continue investing in automation, AI initiatives and alternatives to increase its scale.

SEI also launched its enterprise sales group to focus on larger wealth management firms.

Notably, in its alternatives segment, it continued to see greater activity in private credit, private equity, real estate and infrastructure markets.

However, the firm is suffering from headwinds in the institutional investors segment due to corporate-defined benefit curtailments and annuitizations.

Analysts questioned the leadership about costs, investment manager activity, and client losses.

Management said that regulatory employment programs requiring local talent have been driving up costs, as have mid-year salary adjustments.

On investment managers, the company has seen material margin expansion due to a growing focus by investment managers on premium service and a continued trend of outsourcing in the U.S.

However, the firm has suffered client losses in investment advisors and institutional investors due to fee pressures and plant closures.

For the quarter’s results, total revenue rose only 1.2% year-over-year, while gross profit margin slid by just 0.1%.

Selling and G&A expenses as a percentage of revenue dropped by 11.4% YoY, and operating income more than doubled to $108.5 million for the quarter.

The company's financial position is quite good, with plenty of liquidity, no debt and very strong free cash flow.

Looking ahead, 2023 full-year revenue is expected to decline by 4.1% versus 2022’s results.

If achieved, this would represent a reversal versus 2022’s growth rate of 3.8% over 2021.

In the past twelve months, the firm's EV/EBITDA valuation multiple has risen by a net of around 33%, as the chart from Seeking Alpha shows below:

A potential upside catalyst to the stock could include an improving stock market environment in the U.S. as interest rates ease in 2024.

However, given the stock’s high valuation per my discounted cash flow calculation, my outlook on SEI Investments Company stock is Neutral [Hold].

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