In the late 18th century Sir Joseph Banks accompanied James Cook on his first journey of exploration visiting Australia, New Zealand, Tahiti and many other exotic locations. He was president of the Royal Society for over 40 years and considered one of the greatest botanists of the age. During his tenure in this position Dr. George Shaw presented him with the first complete skeleton and skin of the platypus. Upon seeing the creature he stated “What a strange and beautiful find. But it really shouldn’t exist in today’s world.” Sometimes there are things that – when thrust before us – seem implausible at the time. Things that come to mind are pet rocks, spam (the food, although emails could also apply), Ishtar and these album covers.
I bring this up because efficient market theorists tell us that stocks resembling our platypus simply can’t exist in today’s markets. We beg to differ. Benjamin Graham made a living on finding stocks that were being offered at a price cheaper than their net current assets. Occasionally we come across a stock that we believe represents – in the words of Banks – a strange and beautiful find.
One such company has showed up on our value screens for the past year – Manning & Napier (MN, Financial). The company is an investment management firm best known for its mutual funds but also serving high net worth individuals, pension plans, endowments and foundations. The company was founded in 1970 and currently has roughly $48B of assets under management. The company went public in 2011 at $12/share[1].
So why is this stock of interest? It certainly hasn't been a high flier. It currently trades at almost the exact IPO price as of April 15, 2015. No, the interest lies in its financials. A couple of things stand out. First is in the context of Graham’s net-net model. The company currently has roughly $152M of cash/marketable securities on its balance sheet. With 14.1M shares outstanding the stock has roughly $10.78 of cash per share. Trading at $11.93 (as of April 14, 2015) roughly 90% of share price is backed by current assets. Additionally the company has grown FCF from $62M in 2009 to $170M in 2014 or $12.27 FCF per share.
| Ă‚ | Cash/Securities | LT Debt | ST Debt | FCF |
| Manning & Napier (MN, Financial) | $151.9M | $0 | $0 | $170.3M |
| Shares Outstanding | 14.1M | Ă‚ | Ă‚ | Ă‚ |
| Cash Per Share | $10.77 | Ă‚ | Ă‚ | $12.08 |
| Share Price1 | $11.93 | Ă‚ | Ă‚ | Ă‚ |
| Coverage | 90.2% | Ă‚ | Ă‚ | 101.3% |
1 As of April 14th, 2015
Data provided by GuruFocus
So we have a company that trades at roughly the value of its current net assets and generates 101% of its valuation in free cash. A platypus of a stock indeed. Why then is the stock trading at such levels? We believe several factors play into the market’s mispricing. First is the hopelessly confusing IPO terms and share structure. As seen below – along with the conversion plan in 2017 – most investors can’t get comfortable with MN’s ownership rights and structure.
Another issue is the fact that assets under management contracted in 2014 for the first time since being publicly traded. This wasn’t a huge change but enough apparently for potential investors to shy away.
As we’ve mentioned, this stock has been on our value screen for the past year. We don’t have a position in the company and won’t be establishing one in the foreseeable future. The company doesn't meet several of our criteria including returns on assets, equity, or capital. Additionally we currently own what we consider the pick of the litter – T Rowe Price (TROW, Financial).
We bring this up simply as an interesting case of mispricing within the marketplace. A back of the envelope valuation gets us roughly $25/share or a roughly 55% discount to fair value. We certainly aren’t advising anyone to rush out and purchase the stock. But is it worth further investigation? We think so. When we see a situation like this, we are as perplexed as Sir Joseph Banks when he saw his platypus. While hard to believe opportunities like this “exist in this world,” we highly recommend you investigate it further.
As always we look forward to your thoughts and comments.
[1] For a great review of the company in far more detail see “Manning & Napier: Complicated Ownership Structure And Catalysts Create Nearly 100% Upside” by Deep Value Finder. The article can be found on Seeking Alpha dated March 31, 2015.
