The stock price has tripled over the past couple of years as the private equity market and real estate sector has boomed. More recently, the share price has nosedived by 43% and now looks to be undervalued relative to historic multiples. Let’s dive into the business model, financials and valuation to see if the stock is a potential opportunity.
Diverse business model
KKR is a global alternative asset manager focused on private equity, energy, infrastructure, real estate and credit. It has built its assets under management at a tremendous 22% compound annual growth rate, which is greater than the alternatives market that has grown at an 11% CAGR.
Source: KKR presentation.
The company has a number of scaling strategies, from traditional private equity to health care, infrastructure, real estate and private credit. It has less than 5% market share in the majority of markets it operates in, so the potential runway for growth is huge.
The company utilizes a macro approach combined with deep domain expertise to identify investment opportunities. So far, its strategies have been working tremendously with an internal rate of return of greater than 20% across the majority of strategies. Additionally, the growth equity (health care) has returned a meteoric 64%.
KKR has invested over $6 billion into enterprise software, which is expected to pay off as global software spend is forecasted to reach over half a trillion dollars by 2022. It has also invested over $4 billion into various consumer internet businesses like Lyft (LYFT, Financial), GoDaddy, WebMd, Trainline and more. As people spend more time online and internet access continues to grow, these companies are poised to benefit.
KKR has achieved tremendous financial results over the past few years as they have rode the booming private equity, energy and real estate markets. Total revenue increased to $16 billion, up a staggering 300% from $4 billion in 2020. While operating income increased by five-fold to $4.8 billion.
Margins have also been strong with a gross margin of 41% and operating margin of 29%.
KKR’s balance sheet has approximately $10 billion in cash, up from $6.5 billion in 2020. The company does have a large amount of long-term debt at $38.5 billion, but I suspect this is used more as dry powder for leveraged buyouts as opposed to weighing the company down. The good news is only $300 million of this is in current debt, which is due in the next two years. In terms of valuation, the GF Value Line indicates the stock is undervalued but also a possible value trap due to the sharp pullback recently.
KKR is a solid company that is well diversified across growing markets. Its real assets portfolio is poised to take advantage of the high inflation environment, while the technology investments offer more long-term growth potential. The company's strategies have generated fantastic returns for its investors and the stock now looks to be undervalued after the recent pullback.