Invesco: A Cautious Buy

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Stock: Invesco (ticker IVZ) 

Increasing asset under management should help deliver growth

Invesco, the $13 billion Georgia-based asset management company, delivered 4.7% revenue increase to $2.45 billion in its recent six months of operations and a more impressive 16.8% profit increase to $451.6 million.

Operating expenses rose 6%, while the company recorded $28.6 million higher other income such as from its unconsolidated affiliated equity earnings and others, resulting in higher overall profitability.

So far this year, Invesco has underperformed the broader S&P 500 index has generated 10.9% total returns vs. the index’s 13.2% (Morningstar).

The asset manager also trades at discount compared to industry averages such as 14.6 in PE vs. industry’s 21.2.

Invesco

Invesco was founded 82 years ago and according to filings, Invesco Ltd. is an independent investment management firm dedicated to delivering an investment experience that helps people get more out of life.

Invesco has specialized investment teams managing investments across a broad range of asset classes, investment styles, and geographies.

The company provides a comprehensive range of investment capabilities and outcomes, delivered through a diverse set of investment vehicles, to help clients achieve their investment objectives.

Invesco has a significant presence in the retail and institutional markets within the investment management industry in North America, EMEA (Europe, Middle East, and Africa) and Asia-Pacific, serving clients in more than 100 countries.

In 2016, Invesco generated 53% of its operating revenue in the United States, 22% in the United Kingdom, 13% in Continental Europe/Ireland, and the remaining in other countries.

Assets under management (AUM)

Invesco’s ending AUM as of June 2017 rose 10.1% year over year to $858.3 billion.

Sales and profits

In the past three years, Invesco logged 0.64% revenue growth average, (-)3.15% profit decline average, and 18.6% (Morningstar).

Cash, debt and book value (equity)

As of June, Invesco had $1.97 billion in cash and cash equivalents and $6 billion in long-term debt with debt-equity ratio 0.75 times compared to 0.73 a year earlier. Overall long-term debt rose $402 million while equity increased by $316 million to $7.97 billion.

Meanwhile, 27% of Invesco’s $28.2 billion assets were identified as goodwill and intangibles.

Cash flow

Invesco’s cash flow from operations rose 350% year over year in its six months of operations to $781.6 million brought mostly by higher cash flow from the company’s cash held by consolidated investment products, sale of trading investments (net), and payables.

Capital expenditures were $60 million leaving Invesco with $722 million in free cash flow compared to $109 million a year earlier.

The company allocated $297 million in debt reduction net issuance and other financing activities while having dividends and share repurchases represent 40% of the free cash flow in the period.

The cash flow summary

In the past three years, Invesco allocated $405 million in capital expenditures, raised $4.05 billion in debt (net repayments and other financing activities), generated $1.98 billion in free cash flow, and provided $2.7 billion in dividends and share repurchases.

Conclusion

Invesco’s recent half operations indicated steady growth in operations so far, and along with its other income generating assets, further improve the company’s level of profitability for the period.

Nonetheless, certain metrics indicated a slow decline in recent years. Invesco’s ROA and ROE dropped to 3.36% and 11.1% in 2016 compared to 4.97% and 11.82% in 2014.

Invesco also carried a leveraged balance sheet accompanied by more than a quarter of goodwill and intangibles. The company also has maintained significantly generous payouts to shareholders in recent years.

Analysts have an average buy recommendation with a target price of $38.12 a share vs. $32.78 at the time of writing. Average revenue estimates multiplied with past multiples with a 20% margin indicated a per share figure of $21.

In summary, Invesco is a cautious buy with $36.9 target price.

Quotes

Martin L. Flanagan, president and CEO of Invesco (IIC)

“Our focus on delivering the outcomes clients seek by providing strong, long-term investment performance helped us achieve an adjusted operating margin of 39.3% during the second quarter.”

Disclosure: I do not have shares in any of the companies mentioned.