Alliance Bernstein L.P. – Up from the depths but still worth buying.

AllianceBernstein Holding L.P. is a limited partnership company. They provide research, diversified investment management and related services globally to a range of clients. Its principal services include Institutional Investment Services, Retail Services, Private Client Services and Institutional Research Services. Clients include institutions such as corporate and public employee pensions, endowments and governments. AB also serves various retail clients; private clients, trusts, estates, partnerships, and other entities. They also provide distribution, shareholder servicing, etc. to its sponsored mutual funds.

Both the profits and unit price of AB went way down last fall and winter along with the general market. Fundamentals dictated a drop but the extent appears to have grossly overshot to the downside. Alliance Bernstein units peaked at $94.90 in early 2007 and fell as low as $10.10 at the nadir last March.

Earnings troughed in the March quarter but have recovered steadily since then. Q1 came in at $0.07, Q2 at $0.41 and the recently reported Q3 picked up to $0.67. Full year 2009 estimates have risen over the past month from $1.38 to $1.70 while analysts are now at $2.05 for 2010 versus a month-ago expectation of just $1.71.

The units have surged along with the earnings upgrades. AB has climbed back to $26.02 right now and that is after going ex-dividend for a $0.67 quarterly distribution today.

Here are the per unit figures for AB as reported by Value Line:

As a master limited partnership Alliance Bernstein must pay out the bulk of its profits to its unit holders as cash distributions. Over the past decade AB has paid out $27.48 per unit (including 2009’s declared $1.44) for an average annual distribution of $2.745 /unit.

That period from 2000 through 2009 includes the NASDAQ bust of 2000, the extreme bear market of 2002 as well as the 2008-2009 melt-down. It includes the boom years of 2003 and 2005 – 2007. As such I feel it represents a pretty good indication of what investors can expect over a full cycle or two of ‘normalized’ market action.

At the current price of $26.02 that average annual $2.74 distribution would equal about a 9.5% yield. That’s quite attractive in today’s low interest rate world.

The chart above shows that the average annual P/E for AB was 16.7x over the 9-year period 2000 – 2008. A return to even a 16 multiple on year-ahead estimates of $2.05 would bring AB units back to $32.80 or up 26% from the current quote. Add in the nice quarterly distributions and you have the recipe for a very nice total return play.

Is $32.80 a rational target? I’d say it’s probably too conservative based on the past trading history for AB. Take a peek at the high end pricing from the ’52-week range’ box on the table above to see where AB has typical gone during boom times.

The balance sheet is in good shape with total debt about half of net cash on hand and no maturities coming due anytime soon. Long-term debt equals less than 10% of capital.



Summary: Alliance Bernstein units are good-yielding and moderately priced. Total annual returns could easily exceed 30% based on today’s estimates and could easily be better than that if markets continue to improve over time.



Disclosure: Author is long AB units and short AB puts.



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Dr. Paul Price: After college at The American University [BS - 1971] and dental school at University of Pennsylvania [DMD - 1977] Paul served as a dental officer in the United States Air Force both domestically and overseas in Turkey and England. As his student loans diminished he was seduced by the market. From casual investing, starting in 1977, he devoted more and more time to equity research. In 1987 he made a full-time career switch by joining Merrill Lynch. Over the next 13 years he also worked with A.G. Edwards, Wheat First [now Wachovia Securities], and Ferris, Baker Watts. Dr. Price had enough success to retire in October 2000 but continues to help friends and family with their investments. He continues to give occasional investment seminars for civic groups and business schools.

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