|Shares Out. (in M):||14||P/E||8.7||0|
|Market Cap (in $M):||300||P/FCF||0||0|
|Net Debt (in $M):||150||EBIT||0||0|
Trading at June 2009 prices and 0.8x TBV, OPY is an extremely undervalued and misunderstood, yet growing and recurring revenue nature wealth management business. Shares worth at least $40, or ~2x current price using conservative 2015 assumptions on a standalone basis. In a strategic sale, I believe the business commands at least $50-65, for a potential 2.4-3.1x cash-on-cash return. OPY’s chairman and 22% shareholder, A.G. (Bud) Lowenthal, is 68 years old and the M&A market is active for wealth management companies as banks and brokers compete intensely to grow client assets. The company has been hampered by regulatory settlements, and all signs point to OPY, its shareholders and employees all being better off as part of a large financial institution. Regardless, I believe the stock is dramatically undervalued.
Based in New York City, Oppenheimer Holdings Inc. (“OPY”) is a private client wealth management and asset management company, “masquerading” as a middle-market investment bank. The company has $87bn of client assets under administration, of which $26bn are management fee-based and housed in the Asset Management division. The money management segments of the company generate >200% of the company’s consolidated pro forma pre-tax income, which I expect to be >$120mm for these two units alone in 2015. The company presently has a market cap of $300mm and $150mm of long-term debt, which the company has been repurchasing, in the form of 2018 senior notes. Tangible book value, which should grow quickly, is $357mm, or $26.19, implying the stock trades at a mere 0.8x TBV, an extraordinarily low price for such a business. The stock’s current dividend yield is 2.1%.
Some brief valuation history:
· In late 2009, the stock traded for $33 with a P/TBV of 1.7x (TBV = $20.70).
· In early 2011, the stock traded for $34 with a P/TBV of 1.4x (TBV = $23.67).
· In early 2014, the stock traded for $29 with a P/TBV of 1.2x (TBV = $26.10).
· Currently, the stock trades for $20.92 with a P/TBV of 0.8x (TBV = $26.19).
· From 12/31/08 to 12/31/14, TBV/share has risen from $18.70 to $26.19 and the wealth management divisions’ pre-tax income has risen from $30mm in 2009 to $112mm pro forma for 2014 and client assets are at record levels.
· Tangible book value should continue to grow rapidly due to strong earnings and low dividend payout ratio.
Keys to the Thesis/Why Does the Opportunity Exist?
There are several reasons, which should become clear after doing the work, why this massive mispricing exists:
· Virtually No Analyst Coverage/No Conference Calls = Investors Unaware. There is virtually no sellside analyst coverage, no discussion to speak of on VIC (2 comments on a brief 2013 writeup), never written up on SumZero and negligible hedge fund ownership. Much of this can likely be attributed to the fact that Oppenheimer is widely considered to be an investment bank, while in reality it is a fairly large asset management firm with a little investment bank on the side.
· Confusing 2014 Financials Mask Outstanding Results. OPY’s recent results and 2015 outlook are both outstanding; however they are obscured by two large factors over the last year.
1) First, in 2013 the company realized $33.3mm of incentive fee income from its hedge fund products, while in 2014 it realized only $0.8mm, creating a $32.5mm apparent decline in earnings (split fairly evenly between the PC and AM segments).
2) Second, in the first half of 2014, the company booked $19.7mm of expense in the Private Client segment relating to SEC regulatory oversight matter, which was settled completely a few weeks ago, lifting an overhang on the company. Further, there was likely at least $5mm of non-recurring legal expense in Corporate/Other relating to the regulatory matter in 2014.
In aggregate, these factors led to at least a $57mm decline in reported pre-tax earnings, despite the company’s outstanding performance and growing AUA. Compounding this issue, the $19.7mm regulatory charge was not tax deductible, further depressing Reported EPS. Pro forma excluding these three items, 2014 pre-tax income rose 355% y/y. Further, pro forma pre-tax income in the two money management divisions grew from $73.9mm to $112.7mm.
***To put a finer point on this, the company reported 62c of EPS in 2014, while I believe the company will earn ~$2.40/share in 2015 and has “Strategic Buyer EPS” of ~$5.00/share, excluding any potential incentive fees, which I model at $0 and averaged ~$17mm/annum from 2007-2013, and excluding the possibility that the company stops waiving the $31mm of money-market fees annually if short-term rates rise. If one assumes OPY recaptures half of the money-market fee waiver and a normalized $17mm of incentive fees, pre-tax earnings are an additional $32mm higher, driving an additional $1.30 of EPS, taking pro forma EPS to $3.70 on a standalone basis (a 5.7x standalone P/E at current price).***
· Press Coverage Relating to Settlements. It is possible, if not likely, that press coverage relating to OPY’s recent regulatory settlements resulted in investors selling shares in recent years. The stock traded for $33 in late 2009 and $30 in March 2014, while AUA and AUM are now at record levels. As the chairman said, “Oppenheimer is pleased to put these matters, which involve activity that occurred years ago, behind it. The ability to finalize matters involving two regulatory agencies in a coordinated manner was helpful in bringing this matter to a conclusion.” He also said, “The Company's revenues reached $1.0 billion in 2014 for only the third time in its history driven by increased fees earned on traditional management products and from mergers and acquisitions activity as well as increased institutional equities commissions… We look forward to higher levels of profitability through the considerable improvements in our core capital markets businesses as well as the favorable impact that the expected rise in interest rates will have on our business.”
· High Insider Ownership = Limited Float. OPY chairman Bud Lowenthal owns 22% of the basic shares outstanding and insiders in total own approximately 28% of the basic shares. The balance of the stock is held by fairly strong hands, including a number of diversified long-only firms and ETF managers (e.g. Blackrock, Vanguard). As such, the stock trades only 30-40k shares per day, but this is plenty for most funds to establish a position.
· Diversified, Growing Private Client and Asset Management Units.
a. Private Client (AUA now $87bn as of 12/31/14):
b. Asset Management (AUM now $26bn as of 12/31/14, 77.5% of net asset management fees booked in Private Client unit, 22.5% in Asset Management unit):