Alliance Bernstein (AB, Financial) March 27, 2009: $15.62 /unit
52-week range: $10.12 (Mar. 9, 2009) - $67.75 (Apr. 2, 2008)
Dividend: Variable, 11-year median distribution = $2.74 /year
Alliance Bernstein was formed in 1987 as a spin-off from AXA Financial. They provide institutional investment management as well as serving individuals through broker-dealers. The company is structured as a Master Limited Partnership which means they pay a very low tax rate (4.6% - 9.6% over the past nine years).
They are required to pass through a high percentage of their earnings each year directly to their unit holders who later receive K-1 forms to report their share of the firm’s earnings on their personal tax returns. Over the eleven years from 1998 through 2008 total cumulative per unit distributions totaled $30.13 or $2.74 per year on average. From 2005 through 2008 (when the market was strong) the average payout was $3.64/unit/year.
AB’s stock price has been decimated by the Bear Market’s effect on recent earnings and assets under management. As EPS dropped from an all-time high of $4.33 in 2007 to $2.79 last year the units plunged from $94.90 to $10.12 as recently as March 9th of this year. Last week’s close of $15.62 marked an 18 day rebound of > 54%. These are volatile units.
Did Alliance Bernstein deserve to be knocked down in price? Yes. Was the drop an overreaction? I think so. As an investment company they get paid a percentage of assets under management {AUM} so the 42% decline in AUM in 2008 hurt their profitability. The latest drop in the indices that bottomed on March 9, 2009 further depressed that figure. Will things stay bad forever? We’ve already seen a great bounce since then and the accompanying recovery in AUM.
Even using very pessimistic assumptions for 2009 and 2010 the consensus views for EPS are $1.31 and $1.53 respectively. My guess is that things will be much improved by year end in terms of the stock market even if the economy is months away from showing signs of recovery. If that is the case AUM (and profits) could rise dramatically from the very conservative estimates now on the street.
Cyclical stocks tend to trade at high multiples on weak earnings and low P/Es on peak margin periods. Right now AB is offered at just 11.9x the $1.31 likely cycle-low estimate for this year. AB’s 10-year median P/E has been 16x. Thus, even without improved EPS a normalized 16x multiple would bring these units back to $20.96 or + 34.2% from today’s quote.
Sixteen times 2010’s $1.53 expectation would lead to a $24.48 unit price. Again, that’s without any factoring in of a more favorable investment climate.
Are target prices of $21 - $25 realistic? The absolute LOW prices in the calendar years 2002-2003-2004-2005-2006-2007 were $23.20, $25.80, $31.50, $40.20, $55.40 and $71.30. The annual highs were north of $50 in seven of the past nine years.
Then there’s the yield. As noted previously AB pays a very low tax rate and distributes most of its cash flow directly to its owners. Over the past 11 years the payout ratio of distributions/cash flow has averaged 66.4%. Expected cash flow in this crappy market year = $2.20 /unit. Based on that it’s entirely likely Alliance Bernstein holders will receive about $1.45 /unit this year. That would represent a 9.2% current yield at the current price.
Not only is 9.2% an attractive return in today’s low coupon world but it almost certainly is a baseline that will serve as a springboard to much higher payouts as the markets eventually return to normal.
AB has a wonderful balance sheet. They have zero debt due in the next five years and capital spending needs are running just $0.30 – $0.40 /unit.
What you have here is a high-yielding, well capitalized, low P/E play on a cyclical company near the bottom of the cycle. This offers the classic combination of extensive future earnings growth and an expansion of the P/E multiple. Value Line sees AB’s EPS returning to $3.00 by 2013 and their P/E back at 15 times. That would give you about a tripling of the unit price on top of the generous current income stream.
‘Doom and Gloomers’ need not apply here. However, if you’re long-term bullish Alliance Bernstein units look like the perfect play to take advantage of an eventual stock market rebound.
Want a play for the next seven months? Consider this:
……………………………............………….. Cash Outflow …..........……… Cash Inflow
Buy 1000 AB @ $15.62 ………......………. $15,620
Sell 10 Oct. $15 calls @ $3.20 ……................……………………………... $3,200
Sell 10 Oct. $15 puts @ $3.10 ……................……………………………… $3,100
Net Cash Out-of-Pocket ………......………. $9,320
On expiration date (Oct. 16, 2009) if AB is still above $15:
Your $15 calls will be exercised.
You will sell your units for $15,000.
Your $15 puts will expire worthless (a good thing for you as a seller).
You will likely have collected about $500 or more in distributions.
You will have no further option obligations.
Your cash holdings should be at least $15,500 for the initial cash outlay
of $9,320 for a net gain of $6,180 or + 66%.
This return would be made if the unit price stays unchanged, goes up or even if they drop by up to $0.62 or (-3.96%).
What’s your risk?
If AB units are under $15 on expiration date:
Your $15 calls will expire worthless.
The $15 puts would be exercised.
You will be forced to buy an additional 1000 units and lay out
another $15,000 cash.
You would likely have collected at least $500 in distributions.
You will have no further option obligations.
What’s your break-even price?
On the original units it’s the $15.62 purchase price less the $3.20
call premium= $12.42 /unit.
On the ‘put’ units it’s the $15 strike price less the $3.10
put premium = $11.90 /unit.
Your overall break-even is the average of $12.42 + $11.90 = $12.16 /unit.
At that price your 2000 units would be trading at about 9.3x this year’s estimated earnings and with
an expected 11.9% current yield.
That $12.16 break-even means that Alliance Bernstein could drop by as much as $3.46 /unit (-22%) without you suffering a loss.
Disclosure: Author is long AB units and short AB puts.
52-week range: $10.12 (Mar. 9, 2009) - $67.75 (Apr. 2, 2008)
Dividend: Variable, 11-year median distribution = $2.74 /year
Alliance Bernstein was formed in 1987 as a spin-off from AXA Financial. They provide institutional investment management as well as serving individuals through broker-dealers. The company is structured as a Master Limited Partnership which means they pay a very low tax rate (4.6% - 9.6% over the past nine years).
They are required to pass through a high percentage of their earnings each year directly to their unit holders who later receive K-1 forms to report their share of the firm’s earnings on their personal tax returns. Over the eleven years from 1998 through 2008 total cumulative per unit distributions totaled $30.13 or $2.74 per year on average. From 2005 through 2008 (when the market was strong) the average payout was $3.64/unit/year.
AB’s stock price has been decimated by the Bear Market’s effect on recent earnings and assets under management. As EPS dropped from an all-time high of $4.33 in 2007 to $2.79 last year the units plunged from $94.90 to $10.12 as recently as March 9th of this year. Last week’s close of $15.62 marked an 18 day rebound of > 54%. These are volatile units.
Did Alliance Bernstein deserve to be knocked down in price? Yes. Was the drop an overreaction? I think so. As an investment company they get paid a percentage of assets under management {AUM} so the 42% decline in AUM in 2008 hurt their profitability. The latest drop in the indices that bottomed on March 9, 2009 further depressed that figure. Will things stay bad forever? We’ve already seen a great bounce since then and the accompanying recovery in AUM.
Even using very pessimistic assumptions for 2009 and 2010 the consensus views for EPS are $1.31 and $1.53 respectively. My guess is that things will be much improved by year end in terms of the stock market even if the economy is months away from showing signs of recovery. If that is the case AUM (and profits) could rise dramatically from the very conservative estimates now on the street.
Cyclical stocks tend to trade at high multiples on weak earnings and low P/Es on peak margin periods. Right now AB is offered at just 11.9x the $1.31 likely cycle-low estimate for this year. AB’s 10-year median P/E has been 16x. Thus, even without improved EPS a normalized 16x multiple would bring these units back to $20.96 or + 34.2% from today’s quote.
Sixteen times 2010’s $1.53 expectation would lead to a $24.48 unit price. Again, that’s without any factoring in of a more favorable investment climate.
Are target prices of $21 - $25 realistic? The absolute LOW prices in the calendar years 2002-2003-2004-2005-2006-2007 were $23.20, $25.80, $31.50, $40.20, $55.40 and $71.30. The annual highs were north of $50 in seven of the past nine years.
Then there’s the yield. As noted previously AB pays a very low tax rate and distributes most of its cash flow directly to its owners. Over the past 11 years the payout ratio of distributions/cash flow has averaged 66.4%. Expected cash flow in this crappy market year = $2.20 /unit. Based on that it’s entirely likely Alliance Bernstein holders will receive about $1.45 /unit this year. That would represent a 9.2% current yield at the current price.
Not only is 9.2% an attractive return in today’s low coupon world but it almost certainly is a baseline that will serve as a springboard to much higher payouts as the markets eventually return to normal.
AB has a wonderful balance sheet. They have zero debt due in the next five years and capital spending needs are running just $0.30 – $0.40 /unit.
What you have here is a high-yielding, well capitalized, low P/E play on a cyclical company near the bottom of the cycle. This offers the classic combination of extensive future earnings growth and an expansion of the P/E multiple. Value Line sees AB’s EPS returning to $3.00 by 2013 and their P/E back at 15 times. That would give you about a tripling of the unit price on top of the generous current income stream.
‘Doom and Gloomers’ need not apply here. However, if you’re long-term bullish Alliance Bernstein units look like the perfect play to take advantage of an eventual stock market rebound.
Want a play for the next seven months? Consider this:
……………………………............………….. Cash Outflow …..........……… Cash Inflow
Buy 1000 AB @ $15.62 ………......………. $15,620
Sell 10 Oct. $15 calls @ $3.20 ……................……………………………... $3,200
Sell 10 Oct. $15 puts @ $3.10 ……................……………………………… $3,100
Net Cash Out-of-Pocket ………......………. $9,320
On expiration date (Oct. 16, 2009) if AB is still above $15:
Your $15 calls will be exercised.
You will sell your units for $15,000.
Your $15 puts will expire worthless (a good thing for you as a seller).
You will likely have collected about $500 or more in distributions.
You will have no further option obligations.
Your cash holdings should be at least $15,500 for the initial cash outlay
of $9,320 for a net gain of $6,180 or + 66%.
This return would be made if the unit price stays unchanged, goes up or even if they drop by up to $0.62 or (-3.96%).
What’s your risk?
If AB units are under $15 on expiration date:
Your $15 calls will expire worthless.
The $15 puts would be exercised.
You will be forced to buy an additional 1000 units and lay out
another $15,000 cash.
You would likely have collected at least $500 in distributions.
You will have no further option obligations.
What’s your break-even price?
On the original units it’s the $15.62 purchase price less the $3.20
call premium= $12.42 /unit.
On the ‘put’ units it’s the $15 strike price less the $3.10
put premium = $11.90 /unit.
Your overall break-even is the average of $12.42 + $11.90 = $12.16 /unit.
At that price your 2000 units would be trading at about 9.3x this year’s estimated earnings and with
an expected 11.9% current yield.
That $12.16 break-even means that Alliance Bernstein could drop by as much as $3.46 /unit (-22%) without you suffering a loss.
Disclosure: Author is long AB units and short AB puts.
