Ares Management Corp. (ARES, Financial) is a leading alternative asset manager which specializes in private equity and real estate. The company was founded in 1997 and had their IPO in 2014. Since then, they have generated a stock-based return of 26.7% annually. In fact, there share price has beaten the market, as the S&P 500 generated just a 15.1% annual return over the same period of time.
This stock caught my eye because value investor Joel Greenblatt (Trades, Portfolio) was buying shares in the first quarter of 2022, during which the stock traded for an average price of $76 per share, which is ~14% higher than where the stock trades today. Could this stock now be undervalued? Let's take a look.
Business model
Ares focuses on providing investment products across six main areas:
- Credit
- Private Equity
- Real Assets (Real Estate)
- Secondary Market Solutions
- Strategic Initiatives
- Public Vehicles
In order to give itself an edge in the public markets, Ares focuses on what it calls “self originating” assets, meaning they are usually unique and custom assets designed for investors. The company generates a “wide funnel of opportunities” and then is very selective across that funnel. Most of the company's clients are pension funds and insurance companies, and the culture focuses on providing returns for them.
The company has recently acquired Apex Clean Energy, which is one of the largest privately owned clean energy companies in the U.S. They have over 40 gigawatts of wind, solar, storage and distributed energy resources in development.
Financials
As of the end of fiscal 2021, Ares had $305 billion in assets under management, up an incredible 55% year over year. Net income jumped to $918 million, up a blistering 183% year over year.
For the first quarter of 2022, the company continued to grow despite a large number of economic headwinds. They generated $206 million in after-tax realized income and raised $13.7 billion in gross capital.
According to CEO Michael Arougheti:
“Despite the challenging markets and significant volatility, we continued our strong growth in our core financial metrics during the first quarter, including 59% year over year growth in our fee related earnings.”
The company generated a strong gross margin of 31% and a fantastic operating margin of 19%, which have both been fairly stable over the past few years.
On the balance sheet, the company has $1.3 billion in cash and a substantial $12 billion in long-term debt. However, given the type of business, I don't think this is a real worry. The company pays a healthy 3.71% dividend, which is the second-highest among selected industry peers in private equity (in the below chart, Ares is the red line).
Valuation
In terms of valuation, the company is trading at a higher price-earnings ratio when compared to selected competitors. However, it is trading at a lower price-earnings ratio relative to its own history.
The GF Value chart indicates the stock is modestly undervalued.
Ares is a tremendous company which has been growing assets under management at a blistering pace. Net income has also followed with great growth and a healthy dividend yield is offered to investors. The stock is also undervalued relative to historic multiples, but it is overvalued relative to competitors. The high debt levels and a private market correction could be risk factors moving forward, but on the flip side, real estate tends to hold up well in inflationary conditions.
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