DIAMOND HILL INVESTMENT GRP DHIL
May 03, 2018 - 11:28am EST by
SpocksBrainX
2018 2019
Price: 190.00 EPS 14.48 14.48
Shares Out. (in M): 3 P/E 13 13
Market Cap (in $M): 663 P/FCF 10.7 0
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 413 TEV/EBIT 0 0

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Description

Diamond Hill (DHIL) is an investment manager.    The stock is currently valued at an EV close to 400m despite more than 60m in TTM free cash flow and management has a history of significant regular distributions.   Valuation is down likely due to the current volatile market (relative to last year at least), poor liquidity, and pressures on the long-short fund which is the source of higher margins than other products.   

Here are some positives:

*BS is very strong.  As of 3-2018, company had $58.8m in cash and 191.5m in an investment portfolio.   As is customary with other asset managers, the investment portfolio will flucutate so EV compares have to be viewed in this light.

*Flows remains solid.  Here is a history:

Q1-18                     +256 (+187 pro, 104 sub, -35 inst)

Q4-17                     +23 

Q3-17                     +42 (106 pro, -65 sub, 1 inst)

Q2-17                     +193m (389 pro, -54 sub, -142 inst)

Q1-17                     +167m (310 pro, -78 sub, +65 inst)

Q4-16                     +262m

Q3-16                     -528m (-69 pro, -88 sub, -371 inst)

Q2-16                     +73 (194 funds, -15 sub, -106 inst)

Q1-16                     +357 (+357 pro, -40 sub, 40 inst)

Q4-15                     +385

Q3-15                     +360

Q2-15                     +436 (+353 pro, -16 sub, +99 inst)

Q1-15                     +286 (+474 pro, 41 sub, -229 inst)

Q3-14                     +567 (+597 pro, 62 sub -92 inst)

Q2-14                     +613 (482 pro, 66 sub, 65 inst)

Q1-14                     +560  (367 proprietary funds; 33 sub-advised; 160 institutional)

Q4-13                     +241m

Q3-13                     +85m

Q2-13                     -706m for Q1

Q1-13                     +72m for Q

 *AUM is well diversified:  Last month saw 72% in proprietary funds with 49% in large cap, 21% in long-short, and 19% in small and mid cap.  

*the company has a long history of distributions.   Company distributed 62m in the past 3 years and 85 in the last 5 years.  

*funds make up the bulk of AUM, so there is clarity on performance and fees when using, for example, Morningstar data.  Like some other asset managers, DHIL updates AUM montly.  

There are some negatives:

*stock is a small cap and hard to buy and sell.   Spread is often 1% to 2%, and transacting in quantity can be difficult 

*strategies are closed except for large cap.  To protect investors, DHIL closed all stock strategies except for large cap, though this is a voluntary move and can be reversed at any time.  However, this currently makes perfomance of the large cap fund very important.

*short term 1 year performance, relative to peers, in the funds lag.    As of yesterday, fund performance within the Morn category was as follows for 1, 3, and 5 years

Long-Short   89-51-26    -3.3%

Small-Mid Cap 78-44-25  -0.4%

Large Cap 81-30-16  -5.6%

Small Cap  50-79-75  -1.2%

The biggest concern is the large cap fund given it is the open option.   Note that the SMC and LC are 'gold' rated by Morn and SC is silver rated.  LS is not rated.    LS did see a significant drop in AUm last month.  

*DHIL is a value house.   Value has been out of favor for many years, though DHIL has not been dogmatic in excluding more growth oriented names (for example, MSFT and Alphabet are top holdings in the large cap fund), and inflows indicate they have a niche.  

*the last distribution was palty.  Given current BS strength, DHIL's last decision to only allocate $7 was somewhat underwhelming, esp since capital required to run this business is minimal.

*company is almost entirely a stock manager.   Obviously suffers a double whammy during market declines, with declines in AUM, declines in overall fees, possible declines in flows, and declines in the investment portfolio.   

That's it.   A very cheap name for a well diversified portfolio.  I've owned this for a very long time in varying quantities.  

Notes:  I don't do EPS estimates for asset managers (so just repeated 2017 for 2018 above).   Plus, for cash flow I use the supplemental numbers which strip out activity in consolidated funds.

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

any positive market movement 

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