Description

Bearings. We first looked at IVZ back in March of 2018 after it sold off on disappointing AUM flows. At the time, the stock had fallen to $30/share which implied a 10x forward P/E valuation. We passed over near-term regulatory concerns (MiFID 2, and DOL Fiduciary Rule) and concerns that the active to passive AUM trend and concurrent fee compression was still in the middle innings and earning consensus was potentially high. Earnings estimates have since come in 10% but not as fast as Invesco has de-rated, falling to 7x 2019 P/E. Invesco is cheap any way you look at them. There is a looming potential transaction (announced 9/21/18) which took the stock down another $4/share over the past month that may provide interesting entry points depending how things unfold.

Consensus View. Invesco is an over-levered asset manager over-indexed to active management late in a beta-driven cycle experiencing fee compression and mediocre AUM flows.

Variant Perception:

1. $5B of the $8B in headline debt are CLO assets which should be removed. This drops IVZ’s headline net debt / EBITDA from 4.0x to 0.7x
2. Increasing regulations and fee compression will have a similar effect as the Financial Crisis had on the bulge bracket banks and cement the incumbent bulge bracket with even wider economic moats. The large will get larger (and provide nice inflation protection).
3. Active management is down but not out.

Company Description: Invesco is a global asset manager with $980B in AUM (as of 9/30/18). Originally spun-off from Citizens and Southern bank in 1978, the entity that became Invesco merged with AIM Management in 1996 and subsequently made several acquisitions including, most recently, Van Kampen in 2009, Source ETFs in 2017, and Guggenheim’s US ETF business earlier this year.

Invesco manages $740B actively and $240B passively; $450B in equity products, $230B in fixed income, $150B alternative, $80B in money market, and the rest in balanced/other.

66% of assets are distributed through the retail channel including (e.g. Ameriprise, Schwab) and 34% through institutional (e.g. consultants to pensions and endowments).  

OppenheimerFunds Transaction:

According to Barron’s (9/21/18), IVZ is nearing an agreement to acquire OppenheimerFunds for roughly $5 billion.  Oppenheimer was founded in 1959 and has $250B in AUM, most of which is actively managed mutual funds. Based on data from Morningstar, the AUM mix is comprised of 71% equity and 25% fixed income.

VP 1 – Valuation

I don’t typically highlight valuation as its own variant perception, but in this case, 7x 2019 P/E is too cheap to ignore. Asset managers have historically traded at a 10% premium to the S&P, which is currently trading at 16x 2019 P/E. This implies that Invesco’s earnings are going to fall from $2.86 EPS over the TTM to $1.07 in 2019, a level last “breached” in 2009/2010, during the Financial Crisis. Invesco does face some headwinds as discussed but there is no existential crisis looming around the corner that justifies a 57% discount to the S&P.

VP 2 – Headwinds

Bulge bracket asset managers should correctly be viewed as in the “distribution” business, not the “product performance” business. Invesco’s incumbent status distributing product through the largest broker/dealers should provide an exclusive ticket to gather additional AUM, as the large broker/dealers look to decrease the number of product providers they work with, given increasing regulatory requirements.  

VP 3 – Active Management a Contrarian Play?

It’s become the consensus view that active management is dead. Long-term students of the market know both passive and active management have roles to play in a healthy market. After a 10 year bull market, it shouldn’t be a surprise that AUM is flowing into passive strategies. This is precisely why caution is advisable and perhaps why good deals can be had to scoop up high quality actively managed franchise (if only IVZ had the currency).    

Valuation:

Base Case: Revalues to median 10x P/E multiple in asset manager peer set, implies 40% upside to $28/sh value on 2019 earnings consensus.

Bull case: Revalues to long-term P/E multiple at 14x P/E, implies 100% of upside to $40/share on 2019 earnings consensus.

Risks:

Recession – asset managers have high operating leverage and can experience over 1x beta impacts to earnings vs the S&P 500 performance.

Dilution – news reports that Invesco is looking to buy Oppenheimer Funds for $5B from MassMutual implies likely significant share issuance at 7x P/E

Asset Manager Comps:

Catalyst

Monthly AUM flows prove the large will get larger

Additional news on rumored OppenheimerFunds transaction