Alliance Bernstein ("Ticker: $AB") is a publicly traded asset management company that provides investment management and research services to institutional funds, private high net worth and retail investors. An important factor to consider when analyzing asset management companies are their AUM (assets under management). AUM is the total market value of the investments and investor monies managed by the company. The asset manager makes money by charging a fee based on a percentage of the value of the AUM they manage. The higher, the AUM, the higher fees they charge and vice versa. The AUM can increase and/or decrease if the market value of the assets they are invested in decreases or if investors move more money in or out of the fund. The below chart shows that the value of the AUM of Alliance Bernstein is currently outpacing the revenue they are charging for managing the fund. This can mean that they are underpricing their offering to appear like a cheaper option or that they may start charging a higher premium for their services. AllianceBernstein's operating margins are historically around 20-23% in comparison to the asset management sector's margins of ~30% so for now I am going to assume the former, they are underpricing their product to compete on price.
(*log transformed results for comparison)
Given the noticeable increase in AUM from 2019 through 2020 it is important for us to examine the amount of monies flowing in and out of the company. `Net` outflows were $2.6B driven by exits from retail investors and private high net worth clients. Given the $1B of inflows from institutions it is safe to say there were ~$3.6B outflows from retail investors and private clients. While this only accounts for approximately .5% of the $686B assets being managed I will keep an eye out to see if this trend grows over the future given the disruptions in the asset management sectors by companies like Robinhood and Coinbase. What I found interesting was their number of employees increasing in step with their revenue and earnings. I would think the advents in technology would decrease the need for as many employees, thus causing a drop in employees while maintaining the upward trend in profitability. This may be a sign that their organization operates with a lot of manual processes that can be modernized.
In comparison to the asset management sector as a whole, Alliance Bernstein's stock performance is currently outperforming the majority of the sector. This, however, was not the case last year when the value of the stock dropped to ~$13 a share. The fair value price according to Morningstar at that time was $34 a share. This presented a huge buying opportunity for investors with capital to deploy. Against earnings of $2.49 a share the stock traded at a price to earnings ratio (p/e) of just 5 times earnings (in comparison to their 13x average p/e ratio) and paid a dividend of $.64, a 20% yield at the time. See the below charts that track their price to earnings history, dividend coverage, and earnings quality.
I found it very interesting that AllianceBernstein operates with very little debt and financing and pays a majority of their earnings out as dividends.
I'd like to end my analysis with "Hindsight is 20/20". While I believe AllianceBernstein was extremely attractive as an investment during the market crash in March 2020 I think the value is fully priced in today. I'm curious to see how they adapt to the changing investment climate. They currently have little moat/competitive advantage (the only moat being how annoying it is to pull funds out of an investment management fund); i'll keep them on my watchlist in case there's another market crash. This lesson has further cemented my view that investing in companies that are drastically underperforming their sectors despite favorable fundamentals have a good chance of providing above average returns on investment.