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Jonathan Poland
Jonathan Poland
Articles (453)  | Author's Website |

Carlyle Is Still an Obvious Buy

The stock trades at a discount to larger competitor Blackstone

October 09, 2018 | About:

Private equity is the quintessential capitalist endeavor, but publicly traded private equity firms are a relatively new investment opportunity. The Carlyle Group (NASDAQ:CG) was founded in 1987, but didn't go public until 2012 since the owners could make money on deals instead of stock options. The initial public offering was met with little fanfare as the company raised just $671 million on 30.5 million units priced at $22 each. In other words, investors that bought and held the shares are still down six years later. Carlyle has paid out over $10 in dividends since then, but the stock has been a lagger. Making money on deals isn't the same as building a great business. Yet, compared to its larger competitor Blackstone (NYSE:BX), Carlyle trades at a sharp discount.

By the numbers

Blackstone is twice the size of Carlyle with over $439 billion in assets under management as of June, which generated $8.07 billion in revenue in the last 12 months. Carlyle had $210 billion under management, generating $3.65 billion over the same period. Blackstone has slightly better operating margins. Carlyle generates a slightly better return on equity.

Blackstone's market value, on the other hand, is six times the size of Carlyle, which is where the disconnect is most apparent. With a capitalization of just $7.3 billion, Carlyle is priced at 3.5% of its total assets under management, while Blackstone continues to price above 10% of its assets under management. These two leaders in alternative asset management should be more on par in regards to valuation. Blackstone should, rightfully so, garner the greater total value, but it's not three times more valuable than its leading competitor, especially when that competitor (Carlyle) is likely to document earnings per share in the mid-$2 range during 2018 and 2019, pushing that up into the mid-$3 after 2020. And, there's the rub, because Blackstone has been wildly profitable over the last five years, earning more than $5 billion in net income, and Carlyle has not. Investors are overpaying for Blackstone and underpaying for Carlyle.

via Carlyle Group

Dividends while you wait

Right now, investors are being paid over 6% a year in dividends, which is more than enough to wait for future performance increases. Carlyle is on track to exceed its fundraising goal of $100 billion by 2020, which could push its assets under management over $250 billion with 70% fee-earning funds and $70 billion in reserve ("dry powder") ready for big acquisitions.

Private equity firms are well positioned to buy on the cheap in the coming years and are not bound by geography. Yet, Carlyle is trading at even deeper bargain prices. At 5% of assets under management, the company is a $12 billion to $13 billion company. At 10% of assets under management, it becomes a $25 billion company. That is still smaller than Blackstone, but more in line with its fair value.

Disclosure: I am not long or short any stocks mentioned in this article.

About the author:

Jonathan Poland
I used to manage money. I still publish my thoughts on stocks here on GuruFocus, mainly on big cap companies. I rarely write about stocks that I own. Thank you for reading.

Visit Jonathan Poland's Website

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