GROW - U.S. Global Investors: Navigating Niche Markets Amidst Turbulent Economic Waters

2023-09-25 00:50:48 ET

Summary

• U.S. Global Investors' largest ETF has seen a 25% decline in AUM in the last two months.
• External factors, such as interest rate conditions, pose a challenge to GROW.
• Despite the decline in AUM, the management is keen on maintaining the current dividend.

U.S. Global Investors, Inc. ( GROW ) has seen a 25% decline in its largest ETF's AUM in the last two months and external factors such as the interest rate conditions of the next 6-9 months will pose a challenge to the company. However, the company can still operate on a very high margin due to the nature of its almost passive ETFs and continues to pay monthly dividends so income investors have nothing to fear so far.

GROW is an investment advisory firm with a history spanning over 50 years. The company focuses on niche markets worldwide and provides investment advisory services to U.S. Global Investors Funds and U.S. Global ETFs. At the moment it has 3 publicly traded ETFs. The U.S. Global Jets ETF ( JETS ), holds significant positions in domestic airlines. U.S. Global Go Gold and Precious Metal Miners ETF ( GOAU ) invests in either through active production of precious metals or passive „production" owning royalties or production streams. U.S. Global Sea to Sky Cargo ETF ( SEA ), which holds positions in major cargo shipping companies. GROW earns money through its investment advisory services and management fees on its products.

Earnings

Latest Earnings

In its latest quarterly earnings , GROW reported a net income of $3.2 million or $0.05 per diluted share, a significant improvement from the net loss of $13.5 million or -$0.19 per diluted share in the previous quarter. The company's Adjusted EBITDA for the quarter reached $66.1 million, a growth rate of 34% over the prior-year quarter, and substantially higher than the previous quarter's $39.2 million. GROW's financial position improved with an increase in cash and cash equivalents to $281.5 million and a reduction in the net debt to gross assets ratio of 37.1%. The company also reported higher capital expenditure at $18.7 million compared to the previous quarter's $12.6 million, indicating an investment in growth and development (so far).

Total consolidated operating revenues for the three months ended March 31, 2023, decreased $2.6 million, or 41.3%, compared with the three months ended March 31, 2022. This decrease was primarily attributable to advisory fees decreased by $2.5 million, or 41.4%, primarily as a result of lower average assets under management in the ETFs. Advisory fees are comprised of two components: base management fees and performance fees. Base management fees also decreased, the majority of this decrease was from ETF unitary management fees, which decreased by $2.2 million as the result of a decrease in ETF average assets under management, primarily for the JETS ETF.

Next quarterly earnings

JETS ETF will remain the company's largest ETF for the foreseeable future with an AUM of approximately $1.4 billion. GOAU's AUM stands at $88 million and SEA's AUM is just under $4 million. SEA was launched about a year and a half ago as I mentioned in my previous article and since then it lost approximately $1 AUM which is far from a positive sign in my opinion. This also means that the upcoming quarters' financial results will depend heavily on JETS ETF. And it does not look good. In mid-August, Frank Holmes, the company's CEO and CFO said the following:

American, Delta, and United represent three of the largest holdings in the U.S. Global Jets ETF (NYSE: JETS), so we believe the record financial results are highly positive for what remains our largest fund, with approximately $1.8 billion in assets under management ((AUM)) as of July 31, 2023..."

Unfortunately, since then it lost almost $400 million AUM and from mid-July to mid-September the JETS ETF lost almost a quarter of its assets under management which could seriously hurt GROW's Q3 results.

In addition, the long-term trend does not look attractive, JETS AUM is currently standing at its lowest point in 3 years and I cannot see a major shift in market sentiment, not in the next 6-9 months. Especially, due to the Fed's latest comments on inflation and interest rate decisions in the future. (More on that later.) However, investors might see positive Q2 results because these AUM declines will not appear just yet on paper but a very significant portion of GROW's revenue comes from ETF advisory fees so as I see it, the decline is inevitable for the third and possibly fourth quarter.

External factors affecting the company

External factors affecting GROW and its JETS ETF include the performance of the airline industry and broader economic trends. The domestic airline industry recently reported record-setting revenues for the quarter that ended June 30, with American Airlines and Delta Air Lines both reporting record revenues on strong summer travel demand. United Airlines reported record adjusted EPS and raised its 2023 guidance. On the other hand, after the summer is slowly fading away, the new numbers do not present such fantastic results because summer flight bookings were 23% behind pre-pandemic levels. These airlines represent three of the largest holdings in the JETS ETF, (approximately 30%) making the airlines' financial results highly correlating with the fund's results.

In addition, broader economic trends, such as Federal Reserve interest rate increases, could impact the overall market sentiment, risk appetite, and eventually JETS ETF, GROW. In the latest monetary policy meeting , the Fed announced that in 2023 there still might be another interest rate increase. Although the 2023 and 2024 GDP projections were revised upwards from June, the Federal funds rate projection was also increased for 2024 from 4.6% to 5.1%. This means that the overall market risk appetite will be lower than expected for the upcoming months and investors might not want to get so much exposure to airline ETFs, especially after the last couple of months' disappointing results. This is the main external risk GROW faces due to its large revenue exposure to JETS.

Valuation and Dividend

Looking ahead, GROW's management is optimistic about the future. The company repurchased 61,989 of its shares in July 2023, at a net cost of over $196,000, representing a significant increase from the previous month and the same month a year earlier. The share buyback program continued in August as well, and they bought back a little more than 80,000 shares. Since December 2012, the repurchase program has been in place, with the Board renewing it annually. The program has also been modified in December 2022, making it possible for the company to buy back shares of GROW stock when the price is flat or down from the previous trading day.

GROW has also been a monthly dividend payer, making it attractive for income-seeking investors. The management is keen on maintaining the current $0.0075 per share dividend for the foreseeable future. The board has approved it from October until December 2023. Based on its dividend yield the company might look undervalued because GROW traded above 3% dividend yield approximately 20% of the time in the last 10 years.

However, the stock is not undervalued in my opinion, and the current valuation is more than justified due to the external risk factors and because the company is slowly losing its main revenue source at the moment for now. However, investors do not have to be scared about the future of the company's cash flow because usually the passive nature of ETFs means relatively low fixed costs so GROW's ETFs can operate on a very high margin (sometimes even close to 90%). Another fact that investors need to be aware of is that Frank Holmes, the CEO of GROW has controlling interest for quite a long time so the company will move in the direction he sees fit.

Summary

GROW's recent earnings highlighted a rebound from a previous loss and despite a decrease in total consolidated operating revenues, its financial position has been bolstered with higher cash equivalents and reduced debt. The JETS ETF has lost a significant portion of its assets, impacting GROW's potential Q3 and Q4 results and the long-term trend for JETS AUM is concerning for me as it's at its lowest in 3 years. External factors, such as the Fed's stance on inflation and interest rates, could further affect the company. Despite these challenges, GROW's management remains optimistic, with an active share buyback program and continued monthly dividend payments. However, while the dividend yield might indicate undervaluation, the stock seems fairly valued given the external risks and dwindling primary revenue source. What do you think? What can the future hold for its ETF portfolio and its AUM?

For further details see: