Today’s recommendation is an investment management company stock that pays dividends and has good value and growth characteristics.
Invesco (IVZ)
from Argus Weekly Staff Report
We are reaffirming our BUY rating on Focus List selection Invesco Ltd. (IVZ) with a target price of $36. Invesco is among the largest independent investment management firms, with a large retail equity business that is well positioned to benefit as stocks recover from their abnormal 10-year downtrend. We expect Invesco to report solid earnings growth over the next two years as revenue ramps up, driven in part by the company’s Powershares subsidiary, which offers a wide range of ETFs and other passive investment vehicles. IVZ trades below industry-average levels for P/E, price/sales and price/book. As management focuses on cost controls and boosts margins toward industry average levels, we think that earnings can advance at a double-digit rate, lifting valuations.
Recent Developments
Over the past quarter, IVZ shares have underperformed, falling 5% while the S&P 500has gained 3%. They have outperformed over the past year, with a gain of 25% versus the broad market’s advance of 15%.
The deltas were positive for Invesco in 2Q13. On July 31, Invesco reported adjusted EPS of $0.50, up 25% from the prior-year period but a penny below the consensus forecast and two cents below our estimate. Operating revenue of $1.1 billion was up 15% year-over-year (versus a gain of 11% in 1Q) and 0.3% sequentially.
Earnings & Growth Analysis
Invesco has managed to grow assets under management, revenue, earnings and dividends over the past five years through a combination of organic growth, acquisitions and new product development.
In 2Q13, average assets under management rose 4.1% sequentially (versus an 8% gain in 1Q) to $720 billion, with inflows of $1.4 billion, down from $19 billion in 1Q. Flows were positive in the Active, Passive and Power Shares categories. At the end of 2Q, Passive assets — typically a fast-growing industry segment — accounted for 17% of the firm’s total. ... Based on current revenue, expense and AUM trends, we are maintaining our 2013 EPS estimate of $2.10, above the consensus of $2.06.
We are also maintaining our 2014 forecast of $2.38, as we expect margins to widen further after Atlantic Trust is divested. Over the long term, we expect strong investment results to lead to fund inflows and higher performance fees, and project a long-term growth rate of 10%. ...
Valuation
IVZ shares appear reasonably attractive at current prices in the low $30s. Over the past 12 months, the shares have traded in a range of $22-$35. Versus the peer group, IVZ trades at a P/E of 13-times projected 2013 earnings and at an industry-low 3.3-times sales. The shares also appear inexpensive on a price/book basis, with a multiple of 1.7, and carry a dividend yield of about 3.0%.
Our target price of $36 implies a P/E of 15-times our 2014 EPS estimate, near the industry average but below the multiple of rival T. Rowe Price.
John Eade, Argus Weekly Staff Report, 212-425-7500, September 16, 2013