MANNING & NAPIER INC MN
February 24, 2012 - 11:12pm EST by
SpocksBrainX
2012 2013
Price: 13.18 EPS $1.10 $0.00
Shares Out. (in M): 90 P/E 12.0x 0.0x
Market Cap (in $M): 1,186 P/FCF 12.2x 0.0x
Net Debt (in $M): -81 EBIT 0 0
TEV ($): 1,105 TEV/EBIT 0.0x 0.0x

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  • Recent IPO
  • Asset Management
  • High Dividend Yield

Description

This is a simple idea.  MN is a money manager - as of 12-31-11, AUM was 40.2b.  The stock is a recent IPO originally with a projected range of $15 to $17 but market pressure reduced the IPO issue price to $12.  More than half of AUM is global/international with SA managed in a similar format.  As of the previous quarter, 44% of assets were in funds with 56% separate accounts with 53% equity, 44% blend and 3% fixed income.

 

Here is why I like the stock:

 

1  - strong BS.  MN reported 81m in cash and no debt as of 12-31-11

 

2 - CapEx is minimal.  As with most asset managers, CapEx tends to be minimal with 4.2m total from 2008 to 2010.  Figure 2m a year at most.

 

3 -  Capital allocation.  This is a new IPO but management has committed to a 16c quarterly dividend starting in Q2  or 64c or a 4.8% dividend yield.

 

4 -  Funds are highly rated.  SA are managed in a similar fashion to funds, and of the 10 funds rated 71% of assets are 4 and 5 stars.  The biggest fund (6.6b AUM 9-30-11) is the World Opportunities fund (EXWAX) which is 4 star rated by M* and by their new system gets a 'Gold' rating.  The fund is rated in the top 62%, 42%, and 13% in the past 1, 3, and 5 years within its category, with recent ytd performance in the top 2%. 

 

5 - AUM Is currently a good deal higher than the 12-31 figure.  EXWAX alone is up about 16% ytd, and flows which were negative last Q were 'more encouraging' per management ytd.

 

6 - this is a Team shop.  MN doesn't have any "name" managers and regardless of what you think of the structure (top and bottom up analysts with a research team and senior research group) it has lead to relatively consistency in investment results.  With no star managers, there is no risk of a single person influencing the entire complex.

 

7 - a reasonable valuation.  The company came public at a bad time and the IPO was moved to $12 with the price not much higher.  Using 24.7m from Q4 x 4 (MN figures which exclude a lot of noise from the IPO) gets you to 99m net income annualized.  With 90m shares out and 81m cash, EV is 1105 or a EV/E of 11.2x.  As noted, Capex is minimal so net income is a good proxy for FCF.  As noted, if AUM is up 10% weighted ytd, net income could be more like 27.5 next quarter.   Again, there are a lot of moving parts to these figures but things ought to become clearer in time.

 

Some negatives:

 

1 - This is an IPO, and there is a lot of imprecision to my figures.  I am using the company supplied 90m shares and multiplying Q4 earnings to get an annualized number.  These figures may prove to be off-base.

 

2 - Assets are heavily concentrated in world/international areas and any decline in those areas would lower AUM.  Also, this is essentially an equity shop (fixed income is minimal) so if you are a bear on the market - world and international - this stock is not for you under any circumstance, though AUM in 2007 here was 18.8b and dropped to just 16.2b in 2008 before moving up to 28.3b in 2009.  Net flows were +6.7 in 2009 and +6.5 in 2010.  Flows were even +3.1in 2008. Thus, even if performance sucks, you hope that investors continue to believe in this company.  And customers have been loyal - the prospectus listed less than a 5% customer churn rate for SA assets for the previous 5 years, a pretty remarkable show of loyalty.

 

3 - The complex is closely tied to performance of World Opportunities.  The fund has grown from just 120m in assets in 2003 to 315m in 2006 to 4.9b in 2009 to 6.4b end of Jan12.  There are obviously issues with sustaining performance, but 3 and 5 year numbers remain fine.  The fund has started well ytd.  You never know, but the team structure of this group suggest that asset expansion isn't going to lead to any huge issues.

 

4 - Company is controlled by the founding member (100% of B shares).  Frankly, I've seen this structure before in the AM space and have never considered it a problem. 

 

What has to happen for the stock to succeed:

 

1 - people notice the dividend yield.  Things like this have lit a fire under other stocks and MN payout ratio with 16c in dividend and 28c EPS leads room for further increases as management desires.  You can argue that this will mean less in an asset manager (given ties to the equity markets) but it is still a big number.

 

2 - asset managers come back in favor.  GBL and BEN are also cheaply priced AMs that nobody seems to care about right now (though then you have an oddball like EPHC which seems richly priced).  MN had outflows in Q4 though up for the year and recent history makes this outflow mute, but there is a perception that ETFs are going to rule the world and active management is a waste of time (was last year for most mutual funds).  While ETFs continue to gain in popularity, MN is only managing 40b.  There is a lot of room to grow even in a shrinking market, and MN has grown immensely despite these issues.

 

3- the market can't collapse.  As noted, MN is an equity shop.  Fund performance needs to be above average and you don't need another -30% year.

 

4 - the company can't do anything stupid.   Now a public shop, some companies handle the transition from private to public better than others.   They do need to try to diversify the asset base even more than they have. 

 

I'll admit to being a bit biased before I even looked at this new IPO .  I owned EXWAX for a good length of time and in my very subjective opinion this fund never made any oddball bets and produced that sorta of middle of the road performance with some consistency that most investors crave (for the most part - recent performance has been more volatile at times, but if you read the M* sheets on MN's funds problems tend to be more company specific than concentrated bets gone bad.  In other words, I don't think this company will turn into a repeat of the sort of issues anyone has had with Artio Global (ART) but you can never be sure.  All in all, this is a good bet for a diversified portfolio.

 

Bottom line:  This is an asset manager who grew AUM from 6.9b in 1999 to over 40b today with a variety of challenges that would made growing any business pretty tough.  The PE is close to single digit, retained earnings will be considerable, CapEx is minimal, capital allocation looks promising with a big fat dividend yield near 5%, ytd performance is outstanding in the biggest funds, and the company is well thought of by Morningstar.  In a happy market (+20%), I don't think a 15x PE is unreasonable.  If EA was up 15%, then you'd get close to a $20 stock price.   

 

Catalyst

1 - dividend payment in Q2 making people realize the DY is near 5% at current levels
 
2 - a normal market
 
3 - nothing overly stupid by management
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