Summary
- Invesco is a company I've been positive about since the company started trading at dirt-cheap valuations. Times have not been easy for asset managers.
- Invesco remains as a more "unsafe" investment, but still an attractive one, given some of the fundamentals. "Unsafe" refers to its volatility.
- I'm long Invesco - and I'll show you why here.
Dear readers,
The time has come to take another look at Invesco ( IVZ ). The company, which I've written about twice now, is one of the premier investment management companies on the planet. Since the bottom dropped out of the rate-frothed market a few months back, this company has been in decline. Some would say that the company has been dropping too much.
I am one of those - let's see why that is.
Revisiting Invesco
So - Invesco. The company is one of the largest investment management companies, headquartered in Atlanta, GA.
Aside from its American operations, it has branch offices found in 20 different countries worldwide and operates brands such as Invesco, Trimark, Invesco Perpetual, PowerShares, and others. COVID-19 was a catastrophe for the company, because of some very specific issues with mREITS, when they announced that they were unable to meet margin calls due to dramatic overvaluations. As a result, the company cratered - and since that time, it's been volatile here.
However, the company still has upside, even if the latest quarter goes to show how things are actually down here. Net LT flows are negative $6.8B, with an ending total AUM of less than $1.4B - that's down nearly $200M since 1Q22, with net revenues of around $1.17B, also down almost $100M. On that net revenue, the company makes an adjusted operating income of $411M, which is down almost $80M for the year, and comes to a margin drop of close to 450 bps. Adjusted EPS is down half from a year ago.
The company refers here to the overall volatility of the markets. However, digging deeper, we find actual company resilience here, with stability in key areas with a net-long term inflow of $4.8B for the quarter, and active fixed income up as well. The company managed its savings target ahead of schedule and has an ongoing focus on expense management.
This also saw the company redeem $600M worth of notes early on, with total debt at the absolutely lowest level in over 7 years. Not exactly what you'd expect out of a quarter like this, or with the company trading at the valuation it's currently at.
Take a look at the company's investment performance as of June 30th.
And try to look beyond the current volatility - even if we can expect it to last a few quarters. AUM is down slightly for the quarter.
It shouldn't be a surprise to anyone that flows have reversed course in the current market- and the fact that it's likely to continue as we're looking at the market direction that we're seeing here.
Revenues are down 10% in total (or, 9.9% to be exact) - but focus instead for this quarter, on delivered savings and the company's impressive new normal run rate for expenses.
Profitability is down, but only from the tops it saw during the recent 7 or so quarters - not to normalized longer-term earnings. Demand, despite everything, has remained relatively strong, with growth in passive and money market-AUM's. These are challenging market conditions - which are likely growing worse at this time - but the company is already at a very attractive valuation, growing even more attractive.
Since my last article, the company is down less than 1%, when all things are taken into consideration. IVZ has also kept up with its returns to shareholders - even if we haven't seen the high amount of buybacks we saw in 1Q22. However, leverage is improved, down to below 0.7x, which is impressive given that it wasn't long ago when it was over 1x.
The company's common dividend payout ratio is less than 50%. And remember, that dividend is now 4.55%, one of the higher yields we've seen, excepting when the company faced its catastrophic mREIT-related issues, during which the business dropped to close to 2x P/E.
So - the company's 2Q22 showed some resilience in key performance areas where there is an above-average client demand - everything else was down. This means that business in long-term ETF was up, active fixed was up, and the China JV was up. The company can't do anything about the market, so it instead focuses on things that it can change - like its expenses and margins. Despite cost actions, we can see 35.1% margins here - and this might drop more in the coming quarters.
In a market so rife with chaos and panic, it's easy and understandable to lose sight of what matters long-term. What matters long term is not what share price a company has on day X. It's whether that represents any sort of the fundamental change in the actual earnings capability and cash flows of that company - its ability to pay you, the investor.
The share price for the company has not changed since the last time I wrote about it.
I direct your attention, once again, to IVZ's historical performance, specifically during times of downturns back in 08-09. While the company's EPS dropped by around 20-40% on a year-over-year basis, it also grew by 77% followed by 22% from 2010 to 2011. In short, this company goes down, but it goes back up. Additionally, it hasn't dropped below $1.9/share in EPS in the last 10 years, with a recently-bumped dividend that consumes around $0.79 on a per-share basis per year. The company is expected to repeat this EPS performance metric for the coming year - take a look as we move into the valuation and I show you why I'm favorably minded towards IVZ.
Invesco's valuation
The company no longer trades at below 6x P/E. The current valuation is around 7x because the expectations are somewhat improved here, with expectations now that the company will deliver EPS declines of 37% for the coming fiscal.
This might sound like a horror show, to begin with, but I direct your attention to the latest few years, and the bounce we saw during 2021, which obviously is not a repeatable performance under these circumstances.
IVZ Valuation (F.A.S.T Graphs)
While things aren't quite as low a valuation, they're still at a very good upside. What I mean when I say this, is that Invesco is BBB+ rated, yields 4.55%, and has almost 15% annualized RoR upside, based on a very low growth rate and a low 9.27x forward P/E, which happens to be the 5-year average.
This means you could make around 40.5% total RoR in less than 3 years.
Had you bought the company at a COVID-19 discount, your returns even after this crash would have been 120% in less than 2 years, or 47% per year.
Again, the key is what you pay. In my last article, I calculated at 10-12x P/E - so the change to a 9x P/E represents a far lower forward expectation in terms of valuation, but it still shows us a significant upside.
The likelihood of you beating inflation with this investment is pretty high as I see it. The company could keep trading at 7-8x P/E, and you'd still walk away with more or less double digits under these forecasts.
As I stated in my last article - Investing in opportunities like this is what has allowed me to outperform the market YTD, and for the past 1, 3, and 5 years if looking at broader indexes. I didn't go into this crash with a tech exposure, which means I was saved from the worst of the fall.
I tend to pick investments that are not only "cheap", but qualitative in terms of fundamentals, giving us safety. I also go contrarian quite a bit - if most people say it's time to sell, I look twice at the company to make sure it's not one of the better opportunities out there. You'd be surprised how often this is actually the case if you invest for at least the medium term (3-4 years). Short-term investments are usually not my thing.
IVZ remains a contrarian pick. This company hasn't shown signs of fundamental deterioration in its earnings capability - only issues that come with changes like the ones we're currently seeing and that we're continuing to see.
Based on that, I remain pretty positive about the company and would consider it an interesting "BUY" at this time.
Analysts have seen a significant decline in share price targets since the deterioration of the market. We now have a high of $20 and a low of $16, with an average of around $18.29, almost $2.5/share below the previous targets. The implied upside here is around 11.1%. I would go slightly higher here, and say analysts are being a bit too excessive (as usual - remember that the PT was over $30 a year ago when I was negative on the company), and this is another reason to take a contrarian stance.
I'll remain with my price target at $20/share, discounting it to around an 8-9X 2022E P/E, and calling it a good "BUY" here.
Thesis
My thesis for IVZ is simple.
- 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 4.45% and further dividend cuts seem 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 reiterating "BUY" with a PT of $20/share. You can buy the company here - and I have now done so.
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.
Invesco is currently in a position where #1 is possible in my process, through #3 and #4.
Here are my criteria and how the company fulfills them (bolded).
- 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.
For further details see:
Invesco: The Theoretical Appeal Is Still Very Much There - 'Buy'