Invesco is still a ‘buy’ through 2022 (NYSE: IVZ)
I wrote about Invesco (IVZ) in this article. As I mentioned at the time, I’m usually not the most prolific investor in these types of companies as they are generally volatile in terms of market movements and fund flows. Generally, the companies I invest in have cash flows that are more resilient to market movements.
However, at the right price…I’m in.
And it could be this time, as I see it.
Let me show you why.
Revisit and report on Invesco
For a more fundamental look at business operations, I refer you to my original article. The impact of COVID-19 on the business has not yet subsided, and the company’s 8,000 employees are still working in an environment characterized by headwinds for many business results and trends.
3Q21 was released in October and 4Q21 is on the horizon. This is what we will see here. The company saw excellent capital inflows, with global ETF platform Invesco capturing 6.4% of the sector’s long-term net inflows, above its overall AUM market share of 3.9%. This indicates that despite headwinds, corporate clients continue to believe in Invesco and its products. This tailwind was seen across its various segments, including Private Markets, Active Fixed Income, Global Equities, China and its investment solutions, with ETFs and Fixed Income being by far the largest. of them.
Total inflows were approximately $13.3 billion on a net basis, reflecting organic growth of nearly 4.5% year-over-year.
Invesco met its overall net savings target at the end of 3Q21 and posted adjusted operating margins of 42.1%, which is strong for the segment and the business it is in. Net debt is down and its overall results are continuously beating benchmarks.
The company has been a great company to invest in China, and this is reflected in recent share price performance, with China accounting for over 40% of global flows. Invesco has been present in China for a very long time and ranks 1st among all foreign companies with a similar structure.
The company’s revenue is growing faster than its overall operating expenses, with only slight increases in employee compensation, and some in office and technology, with savings in marketing. Overall, the business savings program is doing its job. Corporate margins have increased significantly over the past 2 years, now exceeding 42% on an adjusted basis.
However, the flow trends are clear: customers now prefer more passive AUMs, where the business has less revenue through lower spend/compensation as well as lower revenue returns. The company was able to offset this somewhat with other improvements as mentioned, but I foresee and see in their future that when this market turns around (as it does now) we will start to see impacts significant on the margins of the company.
The fundamentals of the business are absolutely solid – and I mean it. The company now has less leverage than 1.x net debt/EBITDA excluding prefs and about 2.6x including pref shares. Shareholder returns have been strong and the company’s capital structure is well prepared for a downturn.
Many of the upsides mentioned in 3Q21 are less clear cut than they were in October. Strong demand-based inflows likely took a hit as China turned around, and the recent tech selloff is likely to have effects on the business as well.
However, this does not change some of the core capabilities and benefits of the company.
The benefit of investing in a company because it’s cheap is that your thesis is less based on outperformance, which might and certainly would be unrealistic in a tech bear market, and more based on a fundamental reversal while by reaping attractive dividends.
Let me here reiterate Invesco’s theoretical fundamental appeal at a cheap valuation. I base this on its customer base, size, market share and attractive balance between asset classes.
This downward push of course doesn’t reflect anything close to what we’ve seen during the COVID trend – society has recovered massively from it. However, the dividend cut and the way the company had structured some of its mortgage deals left investors with a bad taste in their mouths, and rightly so.
However, let’s not let that detract from this company’s fundamental upside potential – which is still significant at current valuation levels, and even better than when I last reported on it.
IVZ’s valuation should reflect its position in its peer group – that of one of the least competent asset managers in terms of unadjusted operating margin. For now, I am comparing IVZ to T. Rowe Price (TROW) and Franklin (BEN).
These trends are also visible in most ratios, including RoA, RoE and RoC. IVZ simply performs worse than these peers, as well as other peers. This doesn’t make the company inherently bad; it just means we need to discount and more harshly predict its future to make up for this lack of comparative performance.
Again – remember, dear readers. A company’s poor performance in a peer comparison isn’t automatically uninvestable – it all depends on what you pay. Some would say invest in a class leader at a significant premium over the runner up at pennies on the dollar.
I have the opposite position. Quality is important – but lower margin and yield does not mean poor quality – only that more work is needed.
We can’t take forecast targets as gospel for IVZ, as 40-50% of them, S&P Global and FactSet analysts negatively miss these targets and overstate the company’s performance.
Simply put, we should again expect the company to perform worse than it expects and expects.
It is currently trading at a mixed P/E of 7.75x. Luckily, this is where the positives start to show – as this is a massive peer discount. TRUE? Almost double that P/E. Well? Not quite that high, but still above 9x. IVZ also has an attractive yield of around 3%, compared to TROW at less than 2.6%.
Due to its somewhat worse performance, I wouldn’t say IVZ should be trading anywhere near a 15x P/E – or even a 13x P/E. TROW can go 15x, BEN around 13x on a historical basis. IVZ has a historically established average of around 11 at most. This is more than justified given the reduced dividend and lower margins and yield ratios.
Despite some of the negatives, let’s not forget that IVZ carries this BBB+ rating and cannot be called a “BAD” company. Just not as good as some of these top peers.
IVZ’s conservative rise is significant at this stage and at this valuation.
Even on a flat basis of 7.5x P/E under current forecasts, the return here would be market-matched. Any kind of reversal or outperformance back to historic levels implies that this return hits double digits, including a potential annualized 2023E RoR of 28% based on a forward P/E of 10.8x. I consider this to be the highest the company “should” reach based on current fundamentals.
How does my outlook compare to that of analysts and the market? That’s cautious – but analysts at S&P Global, which currently hold a target range of $26-$38/share with an average of $30/share, still hold no “BUY” recommendations, with less than 30% current analysts recommending “BUY” here despite these price targets (S&P Global).
I think it’s a legacy of the dividend cut as well as exuberant expectations for IVZ. These are not things that I remember. Even on a 2023E P/E of 10.8x, that’s not a $38 share – and I wouldn’t buy it at 10.8x P/E.
Instead, I’ll stick to a “BUY” target of no more than $27/share, which is about a forward P/E of 9x. based on current estimates, I wouldn’t buy more than that, because that’s where the yields become less than attractive.
Even now, I don’t necessarily consider it the BEST company to “BUY” – it’s “a” company to buy. And based on current forecasts, trends, and most importantly, quality and rating, it’s a good choice.
My thesis for IVZ is simple.
- This company is a good investment/asset manager, but not best in class, trading at a significant discount to most of its peers.
- It’s yielding a nice 3% and further dividend cuts seem unlikely at this point. Credit is strong despite the mortgage issues, and the upside, even on an unchanged forward basis, is on par with the market.
- Based on this, I reiterate “BUY” with a PT of $27/share. You can buy the company here.
Remember, I’m all about:
- Buy undervalued companies – even if that undervaluation is slight, and not incredibly massive – at a discount, allowing them to normalize over time and reap capital gains and dividends in the meantime.
- If the company goes well beyond normalization and enters overvalued, I reap gains and rotate my position to other undervalued stocks, repeating #1.
- If the company does not go into overvaluation, but is at fair value, or goes back down to undervaluation, I buy more if time permits.
- I reinvest the proceeds of dividends, labor savings or other cash inflows as specified in point 1.
This process allowed me to triple my net worth in less than 7 years – and that’s all I intend to continue doing (although I don’t expect the same rates of return for coming years).
If you’re interested in significantly higher yields, I’m probably not for you. If you’re interested in 10% returns, I’m not for you either.
If, however, you want to grow your money conservatively, safely and reap well-covered dividends while doing so, and your time frame is 5-30 years, then I could be for you.
Invesco is currently in a position where #1 is possible in my process, through #3 and #4.
Thanks for the reading.