|Shares Out. (in M):||43||P/E||NA||27.8x|
|Market Cap (in $M):||1,185||P/FCF||NA||NA|
|Net Debt (in $M):||-227||EBIT||18||62|
I am recommending the short sale of Cohen & Steers, Inc. (CNS) or alternatively a pair trade with one of the better businesses in the asset manager space (e.g., T. Rowe Price). CNS was written up in January as a long idea by dadande when the stock traded at $23.43. It is up nearly 20% since then with the asset manager group and the broader market also sharply higher. Although CNS is a decent quality business, it operates in a narrow niche (real estate equities) that is generally more volatile than the broad market and remains particularly vulnerable to the unfolding of the commercial real estate cycle. Yet CNS trades at a steep absolute valuation as well as a hefty premium to the asset manager group, including much larger, broader based and higher quality businesses. At current levels, I believe CNS is priced for perfection, perfection that it will not deliver over the next 12-18 months. Absent a huge bull run in both the broad equity market and real estate equities from current levels, it is hard to see how CNS will generate the earnings and cash flow to justify its current valuation let alone an increase in share price from current levels. Although CNS has had considerable momentum with AUM, earnings and its share price as REITs have exploded to the upside in the past year, it has gotten way ahead of itself.
CNS is a manager of income-oriented equity portfolios specializing in U.S. and international real estate securities, large cap value stocks, listed infrastructure and utilities, and preferred securities. The company also manages alternative investment strategies such as hedged real estate securities portfolios and private real estate multimanager strategies for qualified investors. Headquartered in New York City, with offices in London, Brussels, Hong Kong and Seattle, Cohen & Steers serves individual and institutional investors through a broad range of investment vehicles.
CNS had AUM at March 31, 2010 of approximately $27 billion with 200 employees. U.S. real estate securities represent about 45% of AUM with almost another 30% from non-U.S. real estate securities. Clearly, this firm is focused on and geared to the performance of real estate equities, which have been sizzling. For example, the Dow Jones Wilshire REIT index ETF (RWR) is up nearly 2.5x off its bottom last year when CNS AUM troughed at less than $12 billion, a testament to how volatile AUM can be given the reliance on a single, highly cyclical sector.
CNS generated revenues and EBITDA in 2009 (admittedly a tough year) of $123.6 million and $22.6 million, respectively. Current forecasts call for the company to generate 2010 revenues and EBITDA of approximately $200 million and $67 million, respectively, with further substantial increases expected in 2011. At current prices, CNS thus trades for over 14x and 27x current year EBITDA and EPS, respectively. The asset manager group as a whole trades for more like 9-10x EBITDA and 17-20x EPS, though a best-in-class company like T. Rowe Price (TROW) trades at 12x and 22x, respectively. CNS also trades at the high end of the comparables based on TEV/AUM and at a premium to TROW, which has a broader business, stickier assets, less volatility, and better margins.
As a smallish asset manager still run and over 50% controlled by Messrs. Cohen and Steers, CNS also has potential governance and succession issues that a more established institutional firm like TROW simply does not have. Indeed, CNS has filed a registration statement to facilitate the founders’ sale of up to 12 million shares (roughly half their stake), and this filing was made last year when CNS traded at less than $20.
CNS reports earnings after the close tomorrow (April 20), and with their AUM figure for the quarter already disclosed, there is likely more upside than downside to the earnings, which should be pretty strong. To the extent the stock trades higher on the earnings announcement as I believe it may, it would represent a good entry point for establishing a short position or pair trade.
AUM and earnings don't ramp as expected and priced into stock