Is GAMCO a Great Long-Term Investment?

Mario Gabelli's firm is worth more than $70 per share

Author's Avatar
Nov 29, 2015
Article's Main Image

Over 30 years ago, legendary value investor Mario Gabelli (Trades, Portfolio) founded asset management company GAMCO Investors (GBL, Financial). The company has $49 billion in assets under management and provides various services to its clients, which includes mutual funds, close-end funds and private partnerships. GAMCO has made Gabelli and is consistently one of the highest paid executives on Wall Street. Unlike other executives on Wall Street, however, Gabelli's various funds have returned 15%-plus over the last 30 years.

Business overview

The asset management business is all about managing capital given to the company for fees or a share of the profits, which if run effectively, produces gross margin of 80% or more. GAMCO consistently produces high gross margins and profits thanks to the asset-light business model.

Over the last 10 years, the company had an average return on equity of 19% and return on assets of 11%. GAMCO's above average returns on equity and assets reflect the management's ability to effectively run the company. Gabelli has a proven track record and earned his high compensation package.

The company stock is currently selling for $63.40 per share, which is a slight discount to its estimated intrinsic value. As previously mentioned, asset management companies have a light business model that produces large returns if run well. Even if the company was run horribly wrong, it would still be profitable thanks to the fees the company charges. This isn't the case with GAMCO, which earns their fees and have great fund managers in place who have proven records.

Like many other active management investment firms, GAMCO has seen assets under management shrink. The growth in passive ETFs and index funds, plus active funds underperforming the market, has led investors to pull money out of active funds. GAMCO's AUM rose 78% from 2009 to 2013, rising from $25 billion to $47 billion.

GAMCO saw its assets under management double thanks to the company's various funds and other products that have produced a return during that period. I believe that this trend in investors pulling capital out of active funds won't last forever, and GAMCO won't be hurt by it. Over the past 10 years, GAMCO has seen revenues grow by 4.5%, their earnings by 9% and their dividend by 15%. GAMCO isn't growing massively, however, the company is a steady grower and produces above average return to shareholders.

Valuation

GAMCO has produced 10-year average operating earnings of $154.4 million or $6.03 per share. Currently the company is selling for 9.8x its 10-year operating earnings. The company has produced operating earnings of $159.5 million or $6.23 per share last year. At its current market price, GAMCO is selling for 9x last year's operating earnings. The company has a strong balance sheet with $298 million in cash, which is double its long-term debt. Based on GAMCO's strong fundamentals I believe that the company should sell for 12x its operating earnings. At 12x its operating earnings, GAMCO stock would sell for $74 per share.