For most of the past decade, the SEI Investment Co.'s (SEIC, Financial) earnings per share and share price moved along together. However, in 2018 and 2019, the earnings kept growing while the share price stalled:
In 2020, earnings came down, as did the stock price, but we're still left with a significant gap between the two.
Company history and recent earnings
SEI began operations in 1968 with computer-based training simulations for bank loan officers. According to its 10-K for 2019, it went on to become a provider of investment processing outsourcing services to banks and trust institutions. Later, the company broadened its outsourcing services:
"We have evolved these services into innovative, platform-based solutions and financial technologies. We have also expanded into global markets. Today, we serve approximately 11,300 clients in the United States, Canada, the United Kingdom, continental Europe, South Africa and East Asia."
This a hybrid company which offers both financial technology (fintech) and investment management and advice. Its operations are divided into several segments based mainly on targeted markets:
- Private Banks: Outsourced investment processing and investment management platforms for registered investment advisors, financial planners and life insurance agents
- Institutional Investors: Investment management and administrative outsourcing platforms for retirement plan sponsors and non-profit institutions
- Investment Managers: Outsourcing platforms for fund companies, banking institutions, traditional and non-traditional investment managers worldwide
- Investments in New Businesses: Investment management services for American ultra-high-net-worth families
At the end of 2019, SEI managed, advised or administered $1.0 trillion in hedge funds, private equity, mutual fund and other assets through its subsidiaries and partnerships.
To maintain and grow its business, the company invests in research and development. In 2019, that amounted to $163.00 million, or 9.9% of its consolidated revenue. For most of the past decade, research and development was possible because of ongoing growth in free cash flow:
Most of that cash is used to fund growth. Its dividend payout ratio is just 23% and its share buybacks are modest. In 2019, it bought back 6,225,000 shares for $348.3 million; that works out to an average price of $55.96 per share.
As the charts suggest, the company is suffering somewhat from the pandemic-induced economic contraction. Earnings per share are down about 10% since the beginning of 2020, but the company was able to report in its earnings release for the third quarter that it had seen some recovery. Chairman and CEO Alfred West noted, "Our business continued to rebound during the quarter, as our markets adjusted to the current environment."
As for the longer term, I think SEI seems well-positioned for future growth and profitability over the next five to 10 years. Let's take a look at why.
Financial strength
SEI receives an excellent score for financial strength from GuruFocus thanks to its low debt as measured by the interest coverage ratio, the debt-to-revenue ratio and a strong Altman Z-Score.
Note, too, that the return on invested capital, or ROIC, is more than 32% and greatly surpasses the weighted average cost of capital, or WACC, which is just below 7.5%. This means the company is generating earnings that are more than four times as great as the cost of capital.
Profitability
Again, GuruFocus gives the company a high score for profitability thanks to margins and returns that are all in the 20's. What's more, three out of the four metrics exceed those of most companies in the Asset Management industry. The return on equity is higher than nearly 95% of peers and competitors.
Revenue and Ebitda, as averaged over the past three years, have been growing in the single digits, but earnings per share have grown by nearly 17% per year.
Valuation
Despite the financial strength and profitability, SEI is an inexpensive stock, at least according to the GuruFocus Value chart.
The price-earnings ratio is reasonably consistent with the modest undervaluation. It comes in at 16.58, slightly below the 10-year industry median of 17.82 and 18% under its own 10-year median of 20.21. The PEG ratio, however, offers a verdict of overvalued; it is 2.08 where a ratio of 1.0 is considered fair.
Overall, I think it is safe in this case to call SEI a modestly undervalued stock. There is a margin of safety, but whether that is enough safety will depend on the preferences of individual investors.
Dividend and share buybacks
The dividend yield of 1.4% is below the 2% average of the S&P 500 companies. As earlier noted, the dividend payout ratio is low, so there is room for the dividend yield to grow as the company grows.
The TTM (trailing 12-month) yield and the forward yield are the same, suggesting the dividend has not increased this year. However, it did grow from $0.33 per share to $0.35 last December, and it seems likely the company will increase it again next month based on its decision to add another $250 million to its share repurchase program.
The dividend growth rate has averaged 8% over the past three years, and if it grows the dividend over the next five years at the same rate, the five-year yield-on-cost will rise to just over 2%.
The table below also tells us the company has been buying back shares. Over the past decade, it has trimmed its share count by 18.6%:
Total return
Let's look again at the 10-year price chart, this time with a trendline added:
According to the trendline calculations, the share price has grown by 13.87% per year on average (non-compounded).
If we sum the annual dividend yield of 1.4% and the higher earnings per share because of share buybacks (1.86%) with the share price growth rate, we arrive at an average annual growth rate of 17.13%.
That's not guaranteed for the future, of course, but it tells us this modestly undervalued stock could have the potential to provide a satisfactory return to investors. On the other hand, if we look at the trendline in a three-year price chart, we would see capital losses, not gains:
Gurus
In the second quarter of 2020, as the pandemic took hold, gurus decided they wanted to own much less of SEI and began selling out of the stock:
At the end of the quarter, 10 gurus held shares in SEI. The biggest three holdings were:
- Chuck Royce (Trades, Portfolio) of Royce & Associates with 457,269 shares after an addition of 3.51% during the quarter, representing a 0.31% stake in the company
- Tom Gayner (Trades, Portfolio) of Market Gayner Asset Management with 383,200 shares
- Jim Simons (Trades, Portfolio) of Renaissance Technologies with 294,926 shares after a 67.1% reduction.
Conclusion
SEI Investment Company is currently available at a modest discount. That is good news for investors who are attracted by its robust financial strength and profitability.
In my opinion, value investors might want to wait for a better margin of safety just to ensure this company does not disappoint them. More flexible value investors may consider it for their shortlists. Growth investors may perhaps wait for the share price trend to improve. Income investors should look elsewhere.
Disclosure: I do not own shares in any of the companies named in this article.
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