2023-10-16 04:19:20 ET
Summary
- Ameriprise stock gets upgraded to buy rating, from my previous hold rating in June. My upgrade agrees with the buy consensus from Wall Street, SA analysts, and quant system.
- Its strengths include YoY top-line and bottom-line growth, a share price below the 200-day average, and increased AUM/AUA.
- Overvaluation on P/E and P/B seems driven by earnings growth as well as drops in equity.
- The risk of the firm's increasing debt load and interest expense has been discussed.
Research Note Summary
In today's research note I'll be returning to a stock I rated 3 months ago, Ameriprise Financial ( AMP ), a stock in the sector of asset management and custodian banking.
I last covered this stock in my June note when I gave it a hold / neutral rating . This rating proved to be relatively accurate, since the share price since then has only slightly gone down by just -0.16%. So, no major gains or losses there.
Ameriprise - price since June rating (Seeking Alpha)
This time around, I upgraded it to a buy rating and here is why: it showed strong YoY strength in revenue and profitability which I think will continue as it has achieved gains in assets under management which helps drive fee revenue. At the same time, it is dealing with debt woes and the cost of interest.
Methodology Used
I will utilize my WholeScore Rating methodology which looks at this stock holistically across 6 categories including potential downside risks, and assigns a rating score. This analysis will utilize some data from the Q2 earnings release on July 26th (for quarter ending June 30th), since the Q3 earnings figures are not out until Oct. 25th.
Industry Outlook
Ameriprise is part of the asset management and custodial banking sector. To make the comparison against its peer group simplified, I selected 6 peers in this sector to compare their YoY revenue growth .
As you can see from the table I created, Ameriprise leads this peer group of 6 firms in terms of YoY revenue growth, with the average among this group being a YoY revenue decline of -10.89%. Ameriprise, for example, saw a YoY growth of 9.42%.
These 6 were picked out of over a dozen due to all being traded on a major US exchange and having significant name recognition in the market as well as the financial sector overall. They also do very similar things, in terms of making money largely by "managing" money for others, particularly for large institutions and wealth-advisory clients, along with having a sizeable financial custodian business.
In this peer group, you will notice, that Ameriprise beat the likes of global custodian leaders like Bank of New York Mellon ( BK ) and State Street ( STT ), which in my opinion is a significant feat.
Key metrics this sector loves to track are assets under management ((AUM)), assets under administration ((AUA)), and net inflows / outflows, since fee-driven revenue is critical to their business models and so the more capital they look after for others the more fees they can make.
I estimate that Ameriprise will continue to be above this peer average in terms of revenue growth, and in this category I gave them a score of 1.
I am basing my positive sentiment on the fact that, according to their Q2 reported results , their AUM/AUA has hit a phenomenal $1.3T, up 9%.
Ameriprise - AUM (company q2 results)
Financial Statements
When looking further into their Q2 financial statements and comparing to the same quarter in the prior year, we see that YoY revenue saw an incredible 14.8% growth.
In addition, the firm realized a 44.9% YoY growth in net income , which outperformed my goal of a 5% growth.
On the flip side, however, they underperformed my target for free cashflow per share which saw a -60% YoY decline as did positive equity which saw a 5.2% decline.
Ameriprise's balance sheet , I would point out, shows a significant YoY increase in long-term debt and total liabilities, so I estimate that the debt will continue to impact equity even though it remains positive.
I estimate free cash flow per share should improve going forward and both top-line and bottom-line earnings will continue to outperform based on increases to AUM and AUA which will then lead to higher fees earned.
Dividends
The dividends picture for this stock is relatively decent, I think.
Though its dividend yield missed my goal and came in 59% below the sector average, the company did manage a 29.8% growth when comparing the dividend of this quarter to the same quarter three years ago.
This is a significant point because it shows their commitment to return capital to shareholders via dividends has shown improvement over a longer timeframe.
In addition, the dividend of $1.35 per share comes in above my goal which is to earn at least $100 in dividend income per year on 100 shares held, so I look for serious companies with a quarterly dividend of at least $0.25 per share.
Like I mentioned in another research note, I do not invest in stocks or companies but existing cashflow streams, which is not technically that different from earning "rent" every quarter from owning an asset.
My forward estimates are based on the dividend remaining relatively the same going into Q3, and I don't think the share price will face a major dip which could spike the dividend yield. As mentioned, I think the market will remain bullish on this stock due to its proven earning power.
In this category, I gave this stock a score of 2.
Share Price
When it comes to the share price and whether it presents a great buying opportunity right now, let's first look at the chart below which tracks the price against the 200-day simple moving average, which I like to use as a long-term trend indicator.
As you can see, the price saw a lot of bullishness this summer before doing a crossover below the average sometime in October, and now hovering around the average.
In the table I created below, this stock's share price meets my goal of being no more than 5% above the 200-day average. In addition, my 1 year price goal is $357.73, which is anticipating the price going up 10% above the current average.
The above scenario projects a future price gain of $32.82 per share, if I bought at the current price. On a 100 share investment, for example, that is a projected capital gain of $3,282.
Though there is no ideal price to buy or sell at, in my opinion, what I try to do is limit downside risk and maximize upside potential by looking for buying opportunities in relation to the moving average.
Also, though I know only some investors adopt this model and it does not fit everyone's portfolio goal nor should it, it is essentially looking for a stock price not too much above the average, as long as other fundamentals are attractive such as revenue growth.
In this category, I gave this stock a score of 1.
Performance vs S&P500
Next, let's take a quick look at the market momentum of this stock in relation to the S&P500 index.
In the table below I created, this stock did not meet my target which was for it to outperform the S&P by 5% or better. It actually did outperform it in the last year, but only by 1.9%.
Though this is not a negative thing necessarily, the story it tells me is that there is strong market momentum for this stock but it is practically tracking the index closely.
My forward estimate is for it to outperform the index by at least 5% which I do think it can achieve if the upcoming Q3 results continue to show revenue and profitability growth, and if earnings estimates are beat.
In this category, I gave this stock a score of 0 for this time around.
Valuation
When looking at my table below, you will at first glance notice that the stock's valuation metrics (forward P/E and P/B ratios) that I am tracking appear to be overvalued, and exceed my target of no more than 5% above average.
However, they also tell an important story when comparing with the company's financials.
For instance, regarding the price-to-earnings ratio, I will go ahead and say it is justified at 12x earnings because the market sentiment is strong about the earnings potential of this stock. I would be willing to consider up 13x earnings in this case.
If you look at the following comparison I pulled from the list of peers in the asset management sector , you can see that the trailing twelve months net income for Ameriprise puts it 4th among the top 6 in this peer group.
Ameriprise - net income vs peers (Seeking Alpha)
In addition, I earlier mentioned that the firm achieved a 44% YoY net income growth in the last quarter reported. This is a significant profit growth.
When it comes to the price to book value which is almost 693% above its sector average, consider that Ameriprise has seen a YoY drop in equity of 5% and a 7% increase in total liabilities, according to its balance sheet . More importantly, it saw a 27% YoY increase in long-term debt which is significant, so I think that this could be skewing the price-to-book value excessively high.
If you consider the forward P/B ratio of Bank of New York Mellon , which is just 0.88, you should also consider that their long-term debt load has gone up only 7.4% on a YoY basis, based on their balance sheet, and their total liabilities actually decreased over 5% on a YoY basis.
In this category, I gave Ameriprise stock a score of 2.
Forward-Looking Risks
The forward-looking risk I have discovered was already partially mentioned, and that was the increasing debt load but let's not forget the impact of interest expense too, which I consider a downside risk in this current high interest rate environment.
In my table below, I estimated that this risk will have both a high impact and very high probability, so it exceeds my maximum risk score.
One need only see from the company's Q2 report that they saw a whopping 91% YoY increase to interest and debt expenses.
The long-term debt, as you can see from the balance sheet, has been steadily increasing and has seen a sizeable YoY increase of 27%.
The spectre of corporate debt was highlighted in a July article in global news portal Reuters, which presented the following chart which shows an increase in predicted corporate defaults in the US and Europe by spring 2024, citing as causes the high interest rates as one reason:
Though I think that Ameriprise's debt load and interest expense is of concern, it has held up well in terms of positive equity and profitability as I have demonstrated, but nevertheless the debt question should be raised here.
In this category, I gave the stock a score of -1.
WholeScore Rating
In today's re-rating of this stock, it earned a WholeScore of 7, which means I am upgrading it to a buy , from my previous rating of hold.
Ameriprise - WholeScore (author analysis)
This time around, I am essentially agreeing with the consensus from SA analysts, Wall Street, and the quant system, which I think are all on point when it comes to this stock this time.
Ameriprise - rating consensus (Seeking Alpha)
For further details see:
Ameriprise: Upgrade To Buy As Earnings Strength Overshadows Debt Hurdles