2023-06-19 01:14:23 ET
Summary
- I initially recommended Invesco as a "BUY" but turned cautious about the company's valuation and future estimated upside in November 2022.
- I rotated Invesco in early 2023, avoiding the negative RoR during the banking and financial crisis.
- My strategy of setting "Trim" targets for investments and reinvesting in undervalued assets has led to long-term outperformance.
Dear subscribers/followers
I've reviewed Invesco ( IVZ ) a number of times here on Seeking Alpha - initially calling the company a "BUY" to some very good trends, but then going tepid on the company about 7 months back in November of 2022. The reason I went cold was, as you might expect, company valuation combined with future estimated upside. The simple fact is that the company, in my view, wasn't worth what it was being traded at.
I didn't sell or rotate IVZ back then, but I did rotate it when the banking and financial crisis became clearer in early 2023. This, I viewed as the right choice, because it avoided the subsequent downturn and the negative RoR you see here.
Seeking Alpha IVZ RoR (Seeking Alpha)
Providing rotational or trim targets is somewhat controversial, not just in SA. The fear analysts have of being branded as going out "too early" is significant, but it's not one that I personally share. While the typical tendency in outperformance may be to simply raise price targets and expect the investment to continue to outperform, I have "Trim" targets for every investment I make and every holding I have. This does not mean that I don't raise my targets if it's warranted.
One thing I have observed, however, is that I am far more likely to provide articles with rotational targets and strategies. At times, this means I go out "too early" - but more often for me, it means that I save capital from a downturn.
What's more, even if the company doesn't turn sour, the fact that I take that capital and reinvest in other undervalued investments tends to mean that I outperform in the long term regardless of how that original investment falls or doesn't fall.
That's a rough description of my logic here - and one I adhere to pretty strictly, with Invesco as well.
Let's revisit the company and see what we have here.
Invesco - Is there an upside in 2023?
Invesco has been JoJoing up and down for a few years now. First, the company went down to essentially garbage-level valuations in COVID-19, only to rocket back up as though it was Bitcoin when money was "free", trading at levels that I viewed as unsustainable due to the normalized company income.
The company has been a hard one to forecast and invest in. But it's not a "bad" business. Invesco is BBB+ rated and a good name in asset management. The key is always not overpaying for the growth you realistically expect long term . If you overpay for growth that's been happening for a year or so, expecting this to become the new trend, oftentimes you're in for a rough awakening. As were the investors that bought IVZ at 12x multiples to the 2020-2021 numbers, but what was more accurately 35x to recurring/longer-term EPS trends.
So for the past 10 years, and including the next 3 fiscals, the company is now forecasted to generate a negative 1.07% EPS growth rate. If you invested at the bottom, that's not a problem. If you bought the company close to $30/share, that's a definite problem.
IVZ has good profitability. That is not in question. The company is conservative enough, and for asset management, it's conservatively leveraged and well-managed. The revenue to net income trend is pretty damn solid. They've never been "bad", despite what the company's valuation has implied.
Revenue and cash trends over time have been good, and the company has retained a decent enough profitability despite what the market has been throwing at it. IVZ isn't a market leader - but it's a good business, and when a good business is cheap, that's enough for me to start putting capital to work. But IVZ is also a company I watch more closely than some of my other financial investments.
Recent results give us some confirmation that we might see a turnaround and a positive trend from here on out. 1Q23 is the latest quarter we have. Net flows are positive, with an ending AUM that's lower YoY (naturally), but sequentially, it's up and touching the $1.5T mark relatively soon. Net revenues are lower both YoY and sequentially, with an adjusted EPS on a diluted basis that's also trending in the negative direction.
However, there is organic growth to be had for the quarter, despite the mixed picture. Net long-term inflows in the institutional channel are at $6.6B which comes to 7% annualized and the 14th consecutive quarter of net inflows. That's a positive. The same is true for ETF net long-term flows, which have been positive in 10 out of 11 quarters.
IVZ also increased the dividend by 7% - a strong sign from the company and has improved its fundamentals and credit availability through a renegotiation of its credit facility - with some of the lowest debt in over a decade.
So going into a potential recession, almost every company I review seems to have learned its lessons from the GFC. Leverage needs to be controlled, much like a fire. A fire can warm you, a fire can enable you to survive and thrive when others cannot - if controlled. But if uncontrolled, it can burn your entire house to the ground - as we saw in the GFC.
Performance for the company's actively managed assets is okay.
And as I said, despite the turbulence, net flows never really turned negative, not even during 4Q22.
This implies as-of-yet-remaining confidence in the solutions provided and worked with hereby IVZ and similar of its peers.
Also, on the positive side, IVZ may be declining in revenue - but the same is true for company expenses. OpEx is down more than 2.6% sequentially, and above 100 bps for the YoY period, from the sub-segments of employee comp (some of it variable), marketing spend, prop/office tech, and General & administrative. The belt-tightening is working - even if it's a gradual process and I expect more going forward as well.
You can't expect profitability and income to stay at the insane levels brought about by ZIRP. I doubt we'll see such a period again over the next decade or more, truth be told - but it was certainly an exciting time to be in the market, even if I at times felt that I was in a "madhouse". Here are the income and margin trends as they look compared to ZIRP.
I say again, do not expect substantially different trends here - and don't expect them to massively improve either. I expect IVZ to improve slowly and over time, but these sorts of incomes and margins are not something we'll see any time again soon. They were, for lack of a better term "unnatural" - for any timeframe except the one we were in.
To tell you the truth, asset managers and custodial banks are not currently my focus in this sector, finance. If they're attractive, I'm "open" - but I'm also very picky.
IVZ is qualitative. It has a good yield above 4.5%, it has a leverage of less than 1x gross of its preferred stock, and it applies an attractive mix of buybacks and dividends to its shareholders. I'm happy with the double-digit profit I made from my position.
And, under the right circumstances, I can see an upside for the company here - let me show you.
Invesco - An upside does exist, but you should consider other investments as well
Because the company is currently expected to start growing again beyond the 2023E fiscal, a simple forecast does provide investors with some upside. I will however be very clear in pointing out, that to current trends , the company is fairly valued - no more than that.
The upside that other investors may perceive here is based on longer-term forecasted outperformance - that may, or may not happen. How a recession would influence that is also a fair question.
One thing is very clear here - IVZ is currently not a "cheap" company.
And that makes it a difficult case for me, because there are several - many good, in fact - undervalued financials out there that I invest in. IVZ isn't the easiest company to forecast.
Let's say that you forecast IVZ at a 5-year normalized P/E - which just happens to be 8.5x, compared to the 9.97x we have today. Your RoR from such a potential investment to 2025E would be just south of 9% annually or 24.2% total RoR. That's inclusive of dividends. Not the best return I believe you can find here if you look at the market with an open mind.
And that is with expectations of future growth close to double digits on average.
So you might understand why it's hard for me to make a serious and high-conviction case for why you should "BUY" IVZ here. I've read alternative analysts and case studies for the company and what could happen. The arguments here are usually based on the market underpricing one or another of the company's fundamentals or businesses - such as the ETF appeal. Or simply to say that the market is undervaluing that the company has close to $1.5T in AUM.
To me, that's a fairly hollow argument - and I don't like it. Size alone isn't enough for me. The company has maintained attractive margins and profitability, but it would be wrong to say we're at the same level as during ZIRP. Some correction is in order.
I've seen PTs of around $24/share for the company here, or slightly below.
My own previous PT for the company was actually $19/share - and I'm sticking to this PT on a forward basis.
Why?
$19/share is the average of an 8-9x P/E on a 2025E basis, which assumes double-digit growth from Invesco in the next few years, and that valuation to stay at that 8.5-9x P/E range. So you see, I'm not arguing that the company has good margins, or will maintain them. I'm just saying that even if they do, I don't think the market will consistently price the company higher.
$19/share remains the target that makes most sense to me here - both on the upside and on the downside. And here things get somewhat trickier. Because a $19/share PT implies a "BUY" - which the company also is.
However, I want to clearly state to you here that there are better investments out there, in my view. IVZ is in no way sub-par, but I don't view it as "cheap", and the upside is barely market-beating here.
For that reason, here is my thesis.
Thesis
- This company is a good, but not class-leading investment/asset manager that's trading at a significant discount to most of its peers.
- It yields a nice 4.5%+ and further dividend cuts seem extremely unlikely at this point, given the recent bump. Credit is solid despite the mortgage problems, and the upside even on a flat forward basis is market-equivalent.
- Based on this, I'm changing to "BUY" with a PT of $19/share. This is based on a double-digit decline since my change to a "HOLD" target many months ago.
- I rotated my position at $20/share when the banking sector turned more sour - though my position in IVZ was never large, so it was a small effect.
Remember, I'm all about:
- Buying undervalued - even if that undervaluation is slight, and not mind-numbingly massive - companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.
- If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.
- If the company doesn't go into overvaluation, but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.
- I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.
Here are my criteria and how the company fulfills them ( italicized ).
- This company is overall qualitative.
- This company is fundamentally safe/conservative & well-run.
- This company pays a well-covered dividend.
- This company is currently cheap.
- This company has a realistic upside based on earnings growth or multiple expansion/reversion.
The company isn't cheap - but fulfills all other criteria, which makes it a "BUY" for me.
For further details see:
Invesco: Revisiting Upside, Upgrade To Buy