2023-08-02 10:41:16 ET
Summary
- AMP valuation has become more expensive, reaching a height of ~9x PB value.
- 2Q23 financials show positive signs of growth, with strong organic growth in certain segments.
- When ROE normalizes, we should get a much more attractive entry point as valuation should re-rate downwards.
Summary
Readers may find my previous coverage via this link . My previous rating was a hold, as I believed Ameriprise Financial's ( AMP ) valuation had already incorporated all the potential upside in the stock. I am reiterating my hold rating as the valuation has gotten more expensive than the last time I wrote an update on AMP. However, I am positive about the business's ability to regain growth in the long run. All I am waiting for now is a good entry point, which I think will appear after ROE normalizes and that valuation re-rates below.
Financials/Valuation
AMP's 2Q23 pre-tax profit of $1.02 billion was driven largely by AWM's robust margins and decreased operating costs. As a result, operating EPS came in at $7.44, which is in line with the $7.33 expected by the market. A 10% decrease was also seen in the $30 billion in cash reserves held by AWM's core clients. However, certificate of deposit balances increased by 9%. AWM reported strong organic growth of 4.7% annualized growth; in contrast, Asset Management outflows continue to be a problem, reaching $6.8 billion after accounting for distributions.
Since AMP's PB ratio has increased to 9x book from 7.3x, I have maintained my neutral rating. In light of the recent rise in interest rates and the stock's 9x book ratio, this represents a significant premium over (>2x) the stock's average book value from 2018 through 2021. When compared to other large wealth managers such as St. James's Place, Julius Baer, Raymond James, Stifel, and others, AMP is also trading at a significant premium. While I concede that the high ROE may be to blame for the discrepancy, I think it will eventually normalize once interest rates return to normal. AMP's return on common equity has averaged around 30% over the past few years, and it is currently at 56%.
Comments
At the end of 2Q23 , AMP's cash balances were $42 billion, with core cash falling by 10% sequentially to $30 billion. The Asset Management segment, in particular, continued to feel the effects of these pressures, as $6.8 billion left the firm during the period in question. While retail saw the bulk of the outflows, $0.5 billion came from institutional investors.
While the 10% drop is significant in and of itself, I should point out that AMP's competitors (Raymond James Financial, Stifel Financial Corp., and Charles Schwab Corp.) have also experienced drops of about that magnitude this quarter. The good news is that despite tax-driven seasonality in April, the rate of cash outflows slowed from declines in the first quarter. I think there will be significant opportunities for re-deployment of the $70 billion in client cash across the AMP platform once customers begin re-investing in risk assets, as was noted by management. As confidence rises, I believe that the non-deposit/cash will serve as the funding source for client investments into risk assets. As customers keep more operational cash on hand to match their increased trading activity, this may also be beneficial for cash sweep balances.
Positively, AMP has maintained its buyback activity, spending $492 million on buybacks during the quarter. Furthermore, the management restated their objective of achieving an 80% total payout for the year 2023 and unveiled a fresh authorization to repurchase stocks worth $3.5 billion until September 2025, resulting in a collective yield of 10% based on today's market cap.
I am optimistic about AMP's cash position overall for the current quarter because higher yields are providing additional support for continuing tailwinds to cash revenues. While the possibility of interest rate reductions in 2024 is a headwind, it is also likely to be gradual, giving AMP time to re-price its portfolio and keep the segment's overall cash revenues within recent ranges. Assuming that hiring trends continue to improve, and management continues to see evidence of cash redeployment into investment products (based on 2Q23 earnings), AWM's organic growth should resume its ascent in the coming years. Last but not least, I'm heartened by management's dedication to controlling costs and keeping the rate of capital return at a healthy clip.
Risk & Conclusion
AMP's valuation has become even steeper since the last update, leading to me reiterating a hold rating. The company's 2Q23 financials showed positive signs of growth, with strong organic growth in certain segments. However, the increased PB ratio and trading at a premium compared to other wealth managers raise concerns about the stock's current valuation. While the high ROE may explain part of the discrepancy, I expect it to normalize as interest rates return to normal levels.
For further details see:
Ameriprise Financial: Valuation Has Gotten Even Steeper Post Q2