2023-04-05 18:42:00 ET
Summary
- Over the past year, Invesco's -30.34% price decline has trailed the broad market, down -10.43%, and the capital markets ETF, KCE, down -10.46%.
- This is a reflection of the downward pressure of interest rates and inflationary pressures on the broad market, as well as a decline in AUM inflow.
- As opposed to peers such as BlackRock or UBS, Invesco's >$1.4tn AUM is driven principally by retail investors, with 62% of AUM being retail.
- Despite the market sentiment, the asset manager has maintained margin stability at 15.55% profit margins.
- Due to the market overreacting, Invesco's subsequent undervaluation, and the company's continued operational strength, I rate Invesco a 'buy'.
Invesco ( IVZ ) is a global investment and asset management firm with over 8,400 employees across 26 countries.
With over $1.4tn in AUM, the company recorded $5.92bn in 2022 revenues alongside $1.32bn in EBITDA at a 22% margin.
Introduction
At scale, Invesco principally derives income from fees; Investment Management fees accounted for $4.36bn of operating revenues; Service and Distribution fees accounted for $1.41bn; and Performance fees encompassed $68.2mn.
To help ensure investors are given value, Invesco has committed itself to a diverse asset mix and portfolio.
Valuation & Financials
General Overview
As discussed in summary, Invesco's 1Y growth sharply contrasts that of the S&P500 ( SPY ) and the capital markets index.
Though this reflects market sentiment on the strength of capital markets, I believe Invesco has experienced an exaggerated price decline, with the market neglecting Invesco's ability to combat the eminent crises.
Comparable Companies
The asset management industry is driven by actors with large AUMs ranging from the largest and institutionally oriented, BlackRock (NYSE: BLK ), to peers like State Street (NYSE: STT ) and Franklin Resources (NYSE: BEN ), to banks such as UBS (NYSE: UBS ).
As demonstrated above, Invesco has trailed its peers in asset management in recent, 3-month price performance. Manifesting what I believe is a steep undervaluation, Invesco sustains a mid-range ROA and profit margin while maintaining the second-best value, when comparing P/E multiples.
While Invesco does have a lower profit margin than peers, this only serves to reflect Invesco's focus on AUM growth and the subsequent fees attached to it. In contrast, negative EPS growth only highlights the reliance on retail investors for the company; since retail investors are more sensitive to market swings than institutions, this puts downward pressure on Invesco's profits in my view.
Valuation
According to my discounted cash flow model, at its base case, Invesco's fair value is $19.92, up 21% from today's price of $15.77. My model assumes a discount rate of 8%, less intensive than the benchmark WACC of 10% owing to a stronger cap structure as well as superior financial position.
Additionally, Alpha-Spread's multiples-based valuation tool supports the thesis of fundamental market underpricing, with Invesco purported to be undervalued by 50% and a fair value of $31.79. This hyper-undervaluation underscores Invesco's superior multiples with regard to P/OCF, EV/FCFF, and EV/EBIT.
Thus, taking a mean of my DCF and AlphaSpread's relative valuation, Invesco has a base upside of 35.5%, with a fair value of $23.78.
Underlying Strengths and Underpricing Support Growth
In spite of macro headwinds, Invesco has managed to maintain positive net inflows in its portfolio. This is owing to a high degree of AUM diversification - in reference to geographic, channel, and asset classes - in addition to the ability to effectively allocate given capital.
Moreover, the general corporate strategy of the firm - to grow AUM and consequently support fee-related profitability - has been successfully and persistently pursued; Invesco has experienced a 7.8% CAGR across their entire AUM since 2016.
While the increased prominence of the wealth effect and retail investing crowd in recent years has jettisoned Invesco's ETF-heavy product mix, it has also led to the market relating Invesco's price action to retail investor sentiment; as such, Invesco has experienced worse price declines relative to peers. However, the company's financial results rebuke this theory of retail dependency, and while there has been a material negative impact from reduced retail investor activity, I believe the market has overreacted and thus, overall, underpriced Invesco.
Wall Street Consensus
Institutional analysts appear to largely echo my positive view of the company; at its base case, Invesco is projected to experience a 1Y price increase of 13.87% to $17.93.
And despite the turbulence financial institutions in particular face nowadays, analysts largely believe that the worst has blown over for Invesco and its price has mostly bottomed out, projected a minimum price decrease of -5.06%, with relatively low implied volatility to the previous year.
Risks
Retail Sentiment Represents a 'Double-Whammy'
Although, as aforementioned, retail investor sentiment does not adequately and absolutely represent Invesco's overall financial results, it has thus far in the eyes of many of Invesco's shareholders. As a result, beyond the loss from reduced retail activity, poorer retail investor sentiment may lead to negative share-price action as well.
Third-Party Risk is Paramount
As a financial institution foremost, Invesco is exposed to shifts in both capital provisions as well as asset quality. Therefore, the asset manager relies on a host of partners and downstream and upstream parties to support its business. Macroeconomic impacts, regulatory shifts, etc. affecting either can have material consequences for Invesco.
Margin Compression May Accelerate
Principally, Invesco relies on an affordable and accessible product mix to drive consumer engagement. This has, however, led to lower margins relative to peers. And in an environment wherein affordability is key and with larger-scale rivals, Invesco may be forced to further reduce fees in order to meet competition. Ultimately this can lead to diminishing profitability.
Conclusion
In the short term, I expect that Invesco's fundamental undervaluation will be alleviated and a reversion to the mean multiple-based stock price target of the industry will occur.
In the long term, especially as macro conditions improve, I expect Invesco's mass-market strategy to continue to yield rewards and enable future margin expansion.
For further details see:
Invesco: Market Continues To Underprice AUM Scale Advantage