2023-04-20 06:58:48 ET
Summary
- Investors had responded favorably to the recent deal between activist investor Impactive Capital and Envestnet, as ENV's shares rose by more than +20% in the past three weeks.
- Expanding the data & analytics business and accelerating share buybacks are some of the key areas where activist investor involvement could possibly lead to greater shareholder value creation.
- I maintain a Buy investment rating, as I view activist investor Impactive Capital's recent involvement with the company as a positive development.
Elevator Pitch
My rating for Envestnet, Inc.'s ( ENV ) shares stays as a Buy.
I previewed Envestnet's Q3 2022 financial results and discussed about ENV's new wealth data platform in my earlier write-up for the stock published on October 31, 2022.
The focus of my current article is how the recent involvement of activist investor Impactive Capital could potentially support a further re-rating of Envestnet' share price. Reigniting ENV's revenue growth and returning more capital to shareholders are two of the ways that Impactive Capital could play a part in driving value creation for Envestnet. I remain optimistic about ENV's prospects in view of this recent development and retain my Buy rating for the stock.
Activist Investor's Recent Deal With ENV Was Well-Received By The Market
Earlier on March 28, 2023 before the market opened, Envestnet announced that it entered into a "long-term cooperation agreement" with activist investor Impactive Capital. As part of this deal, Lauren Taylor Wolfe and Wendy E. Lane were named as the new independent directors for Envestnet. Lauren Taylor Wolfe is Impactive Capital's managing partner, while Wendy Lane is a director at Verisk Analytics ( VRSK ) and the chair of private equity firm Lane Holdings.
As per a S13D/A filing issued on March 28, 2023, Impactive Capital has a 7.7% equity interest in Envestnet. On its website , Impactive Capital highlights the activist investment firm's strategy of acquiring stakes in "high quality companies at attractive valuations where active engagement" is able to "deliver superior risk adjusted returns over a long term investment horizon."
Impactive Capital's Value Creation Tools
Envestnet's stock price went up by +21% from $54.59 as of March 27, 2023 to $65.89 at the end of the April 19, 2023 trading day. The market has sent a clear signal indicating investors have a favorable view of activist investor Impactive Capital's involvement with ENV. In the subsequent sections of the article, I touch on key areas where Envestnet could create more value for shareholders with Impactive Capital's oversight and advice.
Revenue Growth
In the company's most recent Q4 2022 earnings presentation slides , Envestnet outlined a couple of businesses and products which have the potential to help the company to deliver a faster pace of revenue growth as outlined below.
ENV's Key Products And Businesses That Are Expected To Drive Top Line Growth Acceleration
Envestnet's revenue growth moderated significantly from +18.9% for FY 2021 to +4.5% in FY 2022, and the current consensus FY 2023 top line expansion forecast for ENV is +3.4% . In other words, ENV has lots of work to do to reignite revenue growth. My view is that Envestnet's data & analytics business, which includes the Wealth Data Platform highlighted in the chart above, holds the most promise.
In my end-October 2022 write-up for ENV, I noted that "the Wealth Data platform could possibly add approximately +200 basis points of revenue growth to Envestnet's fiscal 2025 top line." Recent metrics and management commentary also suggest that Envestnet's data & analytics business as a whole is gaining good traction. For example, ENV indicated at its Q4 2022 earnings briefing that customers' "interest in our data set and the research product" has doubled YoY in the first two months of 2023. Separately, Envestnet also pointed to robust "new client sign-ups, user growth" and a "stronger pipeline of institutional opportunities" for its data business in the company's management commentary at its most recent quarterly results call.
As mentioned earlier, one of the new independent directors for Envestnet is Verisk Analytics' director Wendy Lane. On its Seeking Alpha stock profile page , Verisk is referred to as a company which "provides data analytics solutions to the insurance markets." VRSK also claims to have a 75% market share as per its recent March 2023 Investor Day presentation. It is reasonable to assume that the addition of Wendy Lane to Envestnet's board will boost ENV's efforts to expand its data & analytics business.
Shareholder Capital Return
I noted in an earlier section of this article that "capital allocation enhancements" were one of the value creation tools that Impactive Capital has utilized in the past with its investee companies.
Envestnet's 10-year mean consensus forward next twelve months' EV/EBITDA and normalized P/E multiples were 18.2 times and 34.7 times, respectively as per S&P Capital IQ's valuation data. In comparison, the market is now valuing at ENV at 12.2 times consensus forward FY 2024 EV/EBITDA and 24.1 times consensus forward FY 2024 normalized P/E. Despite ENV's good share price performance (+21%) in the last three weeks, Envestnet's current valuations are still pretty attractive. This implies that value accretive share repurchases should be one of the top capital allocation priorities for Envestnet, and this is definitely something that Impactive Capital would have paid attention to.
At its Q4 2022 earnings call in late February this year, Envestnet noted that it "will continue to be opportunistic" with share buybacks going forward, and stressed that it "would consider going back and asking for a greater (share repurchase) authorization from our Board." With Impactive Capital having appointed directors to ENV's board, it is highly probable that Envestnet returns a significant proportion of excess capital to shareholders via buybacks in the foreseeable future.
Concluding Thoughts
I am of the view that Envestnet's shares have the potential to rise further, which supports my Buy rating. Activist investment firm Impactive Capital has taken a more active role in its involvement with ENV, considering the recent appointment of new directors to Envestnet's board. Accelerated share repurchases and a return to a more healthy pace of top line expansion are catalysts that could push Envestnet's stock price higher.
For further details see:
Envestnet: Activist Investor Involvement Is A Positive Development