- Founded in 1970 - Manning & Napier provides individual and institutional investors with long-term, fundamentals-based investment solutions.
- Headwinds in attracting AUM (1% down Y/Y and 7% down Q/Q) don't detract from the potential offered.
- Revenue % of AUM up from 0.78% to 0.79% Y/Y.
- Tight controls on Operating Expenses (7% down Y/Y and 9% down Q/Q) means decent out-turn at the Operating Margin level (10% up Y/Y, 3% down Q/Q).
- New product development focussing on Emerging Markets and global investment echoes our view here at STRIDE.
- Ordinary Dividend Yield of over 5.5% - Special Dividend may take this over 6%.
Manning & Napier (MN) seems to be one of those businesses that has been happy to sacrifice extreme, short-term growth for a manageable, long-term plan that delivers value to both its clients and its shareholders alike. Growing revenues from $50 to $400 over the past 15 years, the business has averaged just under 15% CAGR over this period. Over the same time, they have maintained an average annual account retention rate of over 95%. Getting a clear idea of what the industry average is has been quite tricky, but this number feels solid to me.
While I like this model overall, it seems that when the market moves up dramatically as it has in the last few years, it can affect the AUM negatively.
As with any business in this space, the revenues are highly dependent on AUM. While there has been a slight downtick here (more on this later) - they have grown this at a CAGR of 13.7% since 1999. Again, I like the pace of this growth - they have maintained their structure and client-focus while still growing at a decent rate. This has allowed them time to focus on their process and drive their team-based research model which seems to have served them very well.
At present, it would appear they are underperforming in general and this is driving the current outflow of funds. However, they seem to be prepared for this and feel that their long-term track record is more important than the single year record and that the bulk of their clients feel the same way. It will be interesting to see how the AUM picture looks when they report on the 30th of April.
Ultimately, we are forecasting further shrinkage in the short-term and we still believe that leaves a lot of upside. The reasons are pretty simple; firstly, they focus on the long-term, secondly, they stay focussed on aligning their OpEx and rewards to their revenues and third, they innovate - this allows them to drive the Revenue % of AUM up in small increments while driving additional value to their clients.
STRIDE scores for the business are looking fantastic. For more info on how the scores work, take a look at the scores and ratings video.
The strength score is 100 and we can see from the balance sheet that they have both short-term liquidity and long-term solvency front of mind. Their debt pile sits at $42M, barely a third of their last full year Net Income.
The timing score is 32 shows that the business has been punished by Mr Market over the past year.
The returns score is 100 and we can see that this is reflected in the numbers with their ROA at 42% while ROC is a massive 116% and ROE is 84%. All of these point to a fantastic value play.
The intrinsic value score of 87 is extremely high and practically makes this a 'true book value' play with around 94c in every $1 being hard, tangible assets.
The dividend score is 43 as the yield is good but the payout ratio looks extremely high. When you look into this, you see that this is due to their complex ownership structure. On the surface, it appears there is a payout ratio of 106% last year, however, this actually represented less than 8% of actual earnings.
Earnings predictability is 100 - showing how this business has continued to grow the top, middle and bottom line figures at both an overall and per-share level. Past performance is not a guarantee of future performance, but we like teams that do this consistently.
Our fair value sits at $23.74. Their high scores, consistent cash generation and large cash pile push this up while forecast shrinkage of 3.3% pulls it back a bit. We are seeking a discount of ~$4 / 17.1%, which we feel provides adequate safety for a good entry point. Give that this entry point is nearly $8 away from the current price, we see this as a great value play once the timing score comes right.
The income statement show continued growth with fantastic margins.
The balance sheet evolves meaningfully - especially when focussed on Current Assets and Total Equity.
The cash flow shows practically all cash generated through operations being paid to shareholders.
This company is firmly on our watchlist and we plan to initiate a position as soon as we see some recovery in the share price. With their quarterly report coming out at the end of this month and our forecast shrinkage, that may take some time - but we're patient investors. The minute timing gets to 60, we'll be loading up with this gem.
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