2023-10-26 04:56:27 ET
Summary
- Invesco reported Q3 results highlighted by a mixed bag of operating and financial trends.
- The company continues to face net outflows from active strategies assets under management, which is pressuring margins.
- We expect shares to remain volatile amid the challenging macro backdrop.
Invesco Ltd ( IVZ ) reported its latest Q3 results with EPS slightly below consensus while revenue came in ahead of what was likely a low bar of expectations. Shares sold off on the report and are trading at a 3-year low.
It's been a challenging period for the global asset manager dealing with not only the volatile macro environment but also an ongoing industry shift in assets under management across investment product categories.
Indeed, even as AUM is technically up over the past year, the company continues to record net outflows from more lucrative "active" strategies. The trend has pressured profitability and is a big reason shares are down more than 30% year-to-date, underperforming the financials sector in recent years.
Invesco's financials and overall fundamentals are stable but it's hard to see a catalyst for a major turnaround in the near term. While the stock's 6% dividend yield appears to offer compelling value, we see the upside as limited going forward.
IVZ Q3 Earnings Recap
IVZ Q3 EPS of $0.35 was up from $0.34 in the period last year while adjusted operating revenue of $1.1 billion was down by -1.1% y/y. The story for Invesco this quarter was a modest sequential improvement in financials from Q2 despite several moving parts in the headline assets under management.
Ending Q3 AUM at $1.5 trillion was down by 3.3% from Q2, but still up 12.4% from $1.3 trillion in Q3 2022. Beyond separate inflationary cost pressures on the corporate side including higher employee compensation adding to expenses, the shift in categories of AUM is also reflected in a lower adjusted operating margin which was 28.2% this quarter, down from 33.3% last year.
Digging deeper into those AUM amounts, what stands out is the ongoing decline in net long-term flows into active investment strategies by clients. In Q3, active net flows were down by -$10.9 billion, balanced by a $13.5 gain in passive investment approaches.
The problem here is that as "active capabilities " lose importance across the overall Invesco mix, the net revenue yields get squeezed which flows through the operating margin. The 28.6% net revenue yield in Q3 is down from as high as 40.7% in 2019.
For context, the active category covering "fundamental equities" currently represents about 16% of the business, down from a market peak of 23% in 2021 and even 29% in 2019 as a pre-pandemic benchmark.
In contrast, areas of the business that are less valued added like ETFs and Index funds generating between 15-30 bps of net revenue yield have climbed to 21% of the business from 14% in 2019.
The silver lining here is that management believes this average yield should moderate going forward implying some stability in the operating margin, but that still doesn't begin to address where new growth will come from.
In terms of the balance sheet, Invesco ended the quarter with $1.2 billion in cash and $1.5 billion in debt. The net leverage ratio of 0.7x is otherwise sustainable considering the recurring profitability and positive underlying cash flows.
What's Next For IVZ?
For a business model that centers on accumulating assets under management, the backdrop for Invesco into 2024 faces several headwinds. On the macro side, mixed signals on the strength of the economy along with the new layer of uncertainty with the ongoing Middle East crisis are already impacting sentiment toward equities.
Furthermore, the historic climb in interest rates has translated into a weak environment for fixed-income strategies and bond funds. Tighter financial conditions overall simply aren't helping.
Naturally, a scenario where macro conditions evolve more favorably with a broad-based rally in both stocks and fixed income should be positive for Invesco, but we believe the efforts at supporting markings and squeezing out operational efficiencies have gone as far as they can go.
So what we see here is that even with the consensus outlook for growth rebounding by next year with a forecast for revenues to climb by 1%, we sense that risks remain tilted to the downside. From there, we're also skeptical of the market outlook for EPS to re-accelerate towards $1.66, up 14% compared to the $1.46 2023 estimate.
Asset management, particularly the funds and ETF business is highly competitive, and trends in recent years toward lower-cost funds and declining fee structures for passive strategies will likely continue to weigh on Invesco's results.
On the upside, what we'd like to see is some more encouraging signs toward the active side of the business. These are the strategies and segments within Invesco where the company can shine and deliver value to clients compared to passive indexed funds.
Is IVZ Undervalued?
In terms of valuation, IVZ trading at a 9x forward P/E is at a discount to larger peers like BlackRock Inc ( BLK ) at 16x or even Charles Schwab Crop ( SCHW ) at 15x. At the same time, the company is similarly priced as names like State Street Corp ( STT ) or Bank of New York Mellon Corp ( BK ).
The caveat here is that each of these players has varying business models, in some cases more diversified beyond just "asset management". By this measure, BLK and SCHW justify a premium based on their larger market positioning with a more extensive reach. By this measure, the weakness of Invesco is that the company is particularly exposed to shifting market conditions that drive fund flows.
The strong point when looking at IVZ likely comes down to its compelling dividend yield currently at 6.2% and well above the sector average. In our view, the dividend is safe at the current level for the foreseeable future and could help keep a bid on the stock, but also highlights the company's higher risk.
Final Thoughts
Overall, we rate IVZ as a hold balancing what we view as some ongoing headwinds while recognizing that the deep selloff in shares over the last several months has already priced in some of these weaknesses. In other words, for existing shareholders, we'd say it's likely too late to sell out but would simply avoid the stock for anyone taking a first look.
For further details see:
Invesco: Active AUM Outflows Remains A Concern