Attractive Dividend Yield: AllianceBernstein Holding

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Investors appreciate the company’s payouts

Stock: AllianceBernstein Holding LP (NYSE:AB)

AllianceBernstein Holding LP currently has a very juicy 8.5% dividend yield with trailing 97% payout ratio, and 11.3 times price-earnings ratio.

The $2.3 billion New York-based asset manager appears to have very generous dividend amount compared to the broader S&P 500 index’s 1.89% and 10-year Treasury rate of 2.254%.

According to filings, AllianceBernstein provides research, diversified investment management, and related services globally to a broad range of clients through its three buy-side distribution channels: Institutions, Retail and Private Wealth Management, and its sell-side business, Bernstein Research Services.

The asset manager’s principal source of income and cash flow is attributable to its investment in AB limited partnership interests. AllianceBernstein has 34.8% interest in this partnership as of June 2017.

**This article consists of the company’s operations and figures. For quicker reading jump ahead to the conclusion part.**

Quarterly performance

Interesting fact about the asset manager is that it records only its equity in net income attributable to AB Unitholders. In the recent six months, its income fell 6.9% lower to $97.6 million and a contrasting 7.1% rise in profits to $11.96 million in profits brought by lower taxes.

AllianceBernstein also grew its assets under management by 5.5% year over year to $516.6 billion.

Profits

In the past three years, AllianceBernstein registered revenue growth average of 9.4%.

Balance sheet

AllianceBernstein’s total liabilities fell $72 million while total capital decreased by $99.4 million.

Cash flow

Despite lower profits in the period, AllianceBernstein’s cash flow from operations increased by 23% year over year to $108.8 million brought by higher cash distributions received from its partnership interest.

In recent years, AllianceBernstein has provided most all of its cash flow in dividends.

Conclusion

AllianceBernstein appears to be a well-seasoned asset manager having traced its origins back in 1967. The company has exhibited reliable dividend payouts in the past decade, and the increasing assets under management may further support this trend. Up 11.4% this year compared to the broader S&P500’s 13.43 gains exhibits the near comparison performance of AllianceBernstein plus the hefty dividends.

Meanwhile, one can have a hard time deriving share price using dividend growth and payouts given the company’s varying payouts.

Despite its current juicy dividend yields, AllianceBernstein would further be a very attractive buy given any 5-10% pullback vs. its current share price of $24.5.

Quotes

Seth P. Bernstein, President and CEO of AB (second quarter)

“It’s clear that I’ve joined AB at an exciting point in the firm’s long-term strategic and competitive transition.”

“AB’s momentum accelerated in the second quarter, with 11% year-on-year gross sales growth, active net inflows of $6.6 billion that were positive across all three client channels, 270 points of adjusted operating margin expansion and 26% growth in adjusted earnings per unit.”

“AB’s strategy to maintain a laser focus on investment performance, broaden our global presence, consistently deliver relevant services to our clients and remain vigilant in improving our financial position is the right one, and after years of relentless execution, our steady progress is coming through in the results. Investment performance remains stellar across the fixed income franchise and equity track records keep trending upward. In Retail, gross sales remained at record levels during the quarter, driven by strength in our preeminent Asia ex Japan fixed income franchise, where first half gross sales increased 65% year-on-year and net flows totaled more than $4 billion. In Institutional, we were pleased to see a recovery in activity levels from the first quarter. Gross sales rose 60% sequentially and inflows of $1.2 billion returned to positive territory. We’re particularly encouraged by the positive trend in our pipeline fee rate. We’re winning more mandates in higher fee areas like commercial real estate debt and concentrated active equities – demonstrating the success we’ve had in diversifying our product set. As a long-time personal client, I knew the Bernstein Private Wealth business well coming in, but I didn’t fully appreciate how effective we’ve been in recent years in appealing to larger and more sophisticated clients with our offering. The suite of targeted services, which has $5.5 billion in commitments today, has been instrumental in this effort. On the sell side, I was well aware coming in of Bernstein’s reputation for differentiated institutional research. Now I see how well this business is navigating shrinking trading volumes and fee compression in the US and the MiFID II rollout in Europe, while expanding our research and trading presence in faster-growing international markets. Finally, AB has done impressive work to improve our financials, in particular continuing a five-year trend of margin expansion so far in 2017. The second quarter adjusted margin of 25% was up 270 bps year-on-year, and adjusted earnings per unit of $0.49 were up 26%.”

“Spending time with my new colleagues here has confirmed what I knew coming in: AB is full of brilliant and talented people who are striving to deliver for clients – and succeeding in creating better outcomes for them. It’s an honor to be at the helm of such a great firm, and I’m looking forward to doing what I can to build upon AB’s success from here.”

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

 

Buying Shares in This Pakistan Company May Not Be Smart at This Time: Engro Corporation

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Getting rid of its food business may be a prudent move

Stock: Engro Corporation Ltd (EGCH.KA)

(1 USD equals 105.39 Pakistani Rupee)

The 163.1 billion Pakistani Rupee ($1.55 billion) investment company, EnGro Corporation, has an attractive 7.7% dividend yield, 2.4 times price-earnings ratio, 1.2 times price-book value, and 1.1 times price-sales ratio.

**This article consists of the company’s operations and figures. For quicker reading jump ahead to the conclusion part.**

First quarter performance

In its three months operations that ended in March, the Karachi-based company reported 34.5% drop in revenue to 22.5 billion and 23% profit drop to 2.84 billion.

According to filings, EnGro experienced the disappointing first-quarter results because of its lower urea sales coupled with discounts to sustain market share—indicating more intense competition. In addition, revenues from the company’s dairy business are no more consolidated as a result of the disposal of majority equity interest in EFoods last year.

Total returns

EnGro has returned 3.6% total gains so far this year compared to the Global X MSCI Pakistan ETF (ticker PAK) 15.8% total losses (Morningstar).

EnGro Corporation

EnGro Corporation traces its roots in 1957 and is a Pakistani public multinational corporation based in Karachi with subsidiaries involved in the production of fertilizers, foods, chemicals, energy, and petrochemicals (Wikipedia).

EnGro Corporation Limited is an investment holding company. The Company, through its subsidiaries, is engaged in the manufacturing and sale of cement and building materials, and specialty polymers (Reuters).

EnGro has five segments.

1 Fertilizer: Manufacture, purchase and market fertilizers.

In the quarter, fertilizer revenue fell 15% year over year to 10.1 billion (36% of unadjusted revenue) and profit margins of 16% compared to 18% a year earlier.

2 Polymer: Manufacture, market and sell Poly Vinyl Chloride (PVC), PVC compounds and related chemicals.

Revenue in the polymer business grew 19% to 6.8 billion (24% of unadjusted revenue) and margins of 12% compared to 0.31% a year earlier.

3 Food: Manufacture, process and sell dairy and other food products.

Food revenue fell 98% to 297.2 million and recorded margins of 28% compared to 8% a year earlier. During 2016, EnGro disposed of 54.1% of its investment in Engro Foods Limited (EFoods).

EnGro sold its stake for an estimated $446.81 million to Dutch company FrieslandCampina Pakistan BV (FC Pakistan).

4 Power: Includes Independent Power Projects (IPP)

Revenue in the power business grew 97% to 2.98 billion (11% of unadjusted revenue) and generated margins of 19% compared to 21% a year earlier.

5 Other operations: Includes chemical terminal & storage services.

Revenue in the other operations increased 27% to 7.75 billion (28% of unadjusted revenue) and margins of 74% compared to 68% a year earlier.

Sales and profits

In the past three years, Engro recorded an average revenue growth of 0.39%, profit growth of 103.6%, and profit margin average of 18.5% (Morningstar).

Cash, debt and book value (equity)

As of March, Engro had 607 million in cash and 4 billion in debt with debt-equity ratio 0.04 times compared to 0.1 times a year earlier.

Overall debt increased by 19 million while equity rose 64 billion to 39.8 billion.

Cash flow

In the quarter, Engro did not generate positive cash flow from operations and down to -905.8 million compared to -279.4 million a year earlier. Capital expenditures were 48.2 million.

The cash flow summary

In the past three years, Engro allocated 42.95 billion in capital expenditures, raised 15.94 billion in share issuances, 3.5 billion in debt (net repayments), generated -3.75 billion in free cash outflow, and provided 28.4 billion in dividends.

Conclusion

Engro’s divestment of its food business definitely resulted in a lower business performance in the first quarter albeit it received a good amount of cash in its divestment of its Efood business. Nonetheless, the food business has been a lower profit generator for the company in recent years.

Meanwhile, the company’s polymer business (24% of unadjusted sales) has been consistently a low-profit generator has shown a marked improvement in profits in the recent three months of operations and should be steadily be observed in the coming quarters. Engro also had a marked increase in its power business revenue.

Engro also has a steady balance sheet growth mostly brought by the increase in short-term investments (liquidity) and may be brought by its stake sale last year. Nonetheless, the company has been having troubles in delivering positive cash flow from its operations in recent years.

Applying three-year revenue growth and price-sales multiple followed by a 20% margin indicated a per share figure of 200.87 PKR vs. 311.48 at the time of writing.

In summary, Engro is a pass despite its attractive earnings multiple.

DisclosureI do not have shares in any of the companies mentioned.

An Undervalued Pakistan Bank: Habib (HBL)

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Recent possible blunder could be avoided in the future by a prudent management

Stock: Habib Bank (ticker HBL.KA)

The largest bank in Pakistan, HBL or formerly known as Habib Bank Limited, has been consistently trading at very low valuations in recent years.

The oldest bank in Pakistan that was founded in 1941 traded at price-earnings ratio 8.1 times, price-book ratio 1.4 times, and price-sales ratio 2.4 times.

In addition, the bank has an attractive dividend yield of 7.6%.

**1 USD equals 105.39 Pakistani Rupee

Meanwhile, HBL may be fined $630 million for “grave” compliance failures relating to anti-money laundering rules and sanctions at its only U.S. branch.

**This article consists of the company’s operations and figures. For quicker reading jump ahead to the conclusion part.**

Should a fine be implemented and just half of the said fine at about $315 million would translate into 33.2 billion in Pakistani Rupee (PKR). This penalty would be certainly handled well by HBL as it had about 214.4 billion PKR in cash as of June 2017.

In review, HBL also grew its book value by 2.2% year over year as of June to 196.4 billion PKR having had its debt increase by 95 billion PKR at a debt-equity ratio of 1.98 times compared to 1.53 times a year earlier.

Quarterly performance

Six months into HBL’s operations this year, the bank grew its revenue by 9.4% year over year to 54.2 billion PKR and a contrasting 2.7% decline in profits to 15.49 billion PKR in profits at a margin of 28.6% compared to 32% a year earlier.

Among its expenditures, HBL recorded 11.4% higher in administrative expenses resulting in lower profits in the period.

Total returns

HBL, meanwhile, has returned poorly to its shareholders so far this year having generated 28.44% total losses compared to the Global X MSCI Pakistan ETF (ticker PAK) 15.8% total losses (Morningstar).

Habib Bank

Established in 1941, HBL has a rich legacy spanning over 75 years and is an integral part of the country’s economic progress.

According to filings, HBL is Pakistan’s largest bank with a global reach, operating over 1700 branches and 2000 ATMs and with more than 10 million relationships.

In 2016, Habib derived 97.6% of its profits before tax from Pakistan and 2.5% in Asia and Africa. The bank generated losses of 48.3 million in the regions Europe, Middle East and America.

Habib has six segments.

1 Branch banking

This segment consists of loans, deposits, and other banking services to individuals, agriculture, consumer, SME and commercial customers.

In the recent half, total income in the branch banking business grew 13.4% year over year to 30 billion (52% of all incomes) and generated profit before tax margin of 37.7% compared to 33.8% a year earlier.

2 Corporate banking

Corporate banking consists of lending for project finance, trade finance and working capital to corporate customers. This segment also provides investment banking services including services provided in connection with mergers and acquisitions and the underwriting / arrangement of debt and equity instruments through syndications, Initial Public Offerings and private placements.

Total income was flat in the first half to 4.39 billion (8% of total income) and had margins of 84.7% compared to 85.2% a year earlier.

3 Treasuries

Treasuries consist of proprietary trading, fixed income, equity, derivatives and foreign exchange businesses. Also includes credit, lending and funding activities with professional market counterparties.

In the first half, total income for Treasuries fell 20.9% year over year to 9.98 billion (17% of total income) and had margins of 87.5% compared to 95.2% a year earlier.

4 International banking

International banking is considered as a separate segment for monitoring and reporting purposes and consists of the Group’s operations outside of Pakistan.

Total income in international banking business grew 1.1% to 7.3 billion (13% of total income) and had losses of 81 million compared to 243 million in losses a year earlier.

5 Asset management

This represents HBL Asset Management Limited.

Total income in Habib’s asset management grew 12.8% to 369 million (1% of total income) and generated 42.3% margin compared to 22.9% a year earlier.

6 Head office

This includes corporate items and business results not shown separately in one of the above segments.

Total income for the head office grew 21% to 5.76 billion (10% of total income) and generated margins of 67% compared to 79% a year earlier.

Sales and profits/performance metrics (three-year average; Morningstar)

Revenue growth: 14.2%

Profit growth: 14.2%

Profit margin: 33%

Return on assets: 1.64%

Return on equity: 20.5%

Cash flow

In the first half, Habib’s cash flow from operations declined by 90% year over year to 8.5 billion. The bank recorded much higher cash outflow in relation to its lending to financial institutions, net investments in held-for-trading securities, advances, and other assets among others.

Capital expenditures were 15.3 billion leaving Habib with -6.9 billion in free cash outflow compared to 80.8 billion a year earlier.

Nonetheless, dividend payouts were 7.07 billion and raised 52 million in financing activities.

The cash flow summary

In the past three years, Habib allocated 14 billion in capital expenditures (net), raised 7.16 billion in debt (net repayments), generated 565.8 billion in free cash flow, and provided 56 billion in dividend payouts at an average payout ratio of 11%.

Conclusion

Taking such reckless risk and getting entangled in possible wrongdoings in the United States resulting in marked penalties is just as plain as having a group of rotten apples in Habib’s US’ bank. In simple terms, the region (including the Middle East and Europe) has by far generated losses for the bank in recent years and there could be no other prudent reasons for the largest Pakistan bank to partake in such.

Meanwhile, the bank’s profitability has suffered in recent first-half operations brought by higher operating expenses despite overall growing revenue.

Habib’s branch banking business (52% of total income) has consistently grown and remained profitable in the recent period, while the bank’s international operations (13% of business) has delivered consistent losses.

Habib also has grown its book value and had even more leveraged balance sheet in the recent period, while having maintained good and for what it seemed conservative dividend payouts to its shareholders in recent years.

Applying five-year book value growth and a 20% margin indicated a per share figure of 196.36 PKR per Habib share vs. 185 at the time of writing.

In summary, Habib is a hold with 195 PKR target price.

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

Philippine Lottery Equipment Provider Has Provided Steady Growth

loto

Pacific Online Systems’ arrangement with PCSO entails a deep moat

Stock: Pacific Online Systems Corp (ticker LOTO)

Pacific Online Systems’ shares have been on its lowest point for the past year at 10.98 Php at the time of writing.

As gaming systems and equipment lessor provider to the Philippine Charity Sweepstakes Office (PCSO), Pacific Online Systems surely is worth a look.

**This article consists of the company’s operations and figures. For quicker reading jump ahead to the conclusion part.**

Pacific Online Systems

According to filings, Pacific Online Systems was founded in 1993. Pacific Online Systems’ has majority direct and indirect ownership in the following companies: Loto Pacific Leisure, Lucky Circle, Total Gaming Technologies, and Falcon Resources.

As of December 2016, Pacific has over 6,000 lottery terminals nationwide, and has 100% coverage of Visayas and Mindanao, while just 8% in Luzon.

In 1995, the company had an Equipment Lease Agreement (ELA) with the PCSO’s online lotto operations in the Visayas and Mindanao operations. Since then, the ELA has been amended in 2004, 2012, 2013, and 2015.

The ELA amendment in 2015 extended this agreement until 2018 along with a 5 million Php cash bond on Pacific to ensure liquidity in its operations until then.

According to its ELA, Pacific is to earn rental revenue per equipment at a fix 35,000 Php per terminal or whichever is higher, annually.

Total Gaming Technologies

Meanwhile, Pacific’s 98.92% ownership of Total Gaming Technologies, which does online keno (Lotto Express) operations nationwide for PCSO, makes it possible for Pacific to earn revenue at a fixed annual rate of 40,000 per terminal or whichever is higher, annually.

Total Gaming Technologies has an ELA agreement with PCSO that expires in 2020.

Lucky Circle

Pacific owns 97.64% of Lucky Circle. Lucky Circle is an authorized PCSO agent operating online betting stations that sell sweepstakes, lotto, keno and instant tickets in outlets located in major shopping malls like SM Supermall, Robinsons, and Gaisano nationwide. Lucky owns a certain percentage of the sales as commission income.

Falcon Resources

Interestingly, Falcon is 100% owned by Total Gaming Technologies. Falcon is engaged in consultancy services for Total Gaming Technologies and a sub-distributor of instant scratch tickets

Ownership

50.1% of Pacific is owned by Premium Leisure Corporation (ticker PLC) and 8% owned by the company’s chairman, president, and director since July 1999, the 56-year-old Willy Ocier.

Premium Leisure defined itself as an investment holding company that participates in gaming-related businesses in the Philippines. Willy, on the other hand, is engaged in different chairman and chief executive positions in other companies such as Belle Corporation (ticker BEL), Premium Leisure, Tagaytay Midlands Golf Club, Philippine Global Communications, among others.

Operations

Pacific has two segments: Leasing activities and Distribution and retail activities.

Leasing activities

In the first half that ended in June, revenue for Pacific’s leasing activities rose 18.9% year over year to 893 million Php or 85% of total revenue. The leasing business generated 35% income before tax margin compared to 32% a year earlier.

Distribution and retail activities

Revenue in the distribution and retail business grew 13.9% to 158.8 million Php (15% of revenue) and generated 35% in income before tax margin compared to 42% a year earlier.

First-half operations summary

In its latest six months operations, Pacific’s overall revenue increased by 12% compared to its year-ago period to 511.8 million Php. In contrast, profits fell by 18% to 109.1 million Php brought by higher costs and expenses.

Sales and profits

In the past three years, Pacific generated 4% revenue growth on average, 7% profit growth, and had a profit margin average of 20.75% (Morningstar).

Valuations

Pacific trades at some discount in terms of earnings multiple having a 10.84 times price-earnings ratio vs. sector figure of 12.37 times, and a price-sales ratio of 2.35 times vs. 13.6 times. The company also has a trailing dividend yield of 2.73%.

Total returns

The company has provided a meager 3.02% total returns so far this year compared to the iShares MSCI Philippines ETF (ticker EPHE) 15.45% (Morningstar).

I consider EPHE as a barometer of the overall Philippine Stock Market’s performance.

Cash, debt and book value (equity)

As of June, Pacific had 272 million Php in cash and cash equivalents, and 101.75 million Php in lease obligations with a leverage ratio of 0.05 compared to 0.04 a year earlier.

Overall obligations increased by 17.5 million Php while equity declined by 85.9 million Php year over year to 1.94 billion Php.

Cash flow

In the recent six months of operations, Pacific’s cash flow nearly doubled to 405 million Php brought by higher income before tax, and cash flow from retirement cost, unrealized foreign exchange activities, trade and other current liabilities among others.

Capital expenditures were 40 million Php leaving Pacific with 364 million in free cash flow compared to 203 million Php a year earlier.

In addition, Pacific’s dividend payouts in the period represented 70.6% of its free cash flow.

The cash flow summary

In the past three years, Pacific allocated 508 million Php in capital expenditures, raised 289 million Php in stock issuances, generated 641 million Php in free cash flow, and paid out 747 million Php in dividends and share repurchases at an average free cash flow payout ratio of 124%.

Conclusion

Looking at Pacific’s recent business operations that ended in June, the company surely has maintained healthy growth in its operations only hampered by increased in overall expenses resulting in lower profitability.

The company’s restricted entry in Luzon, which has generated about 63% of PCSO lotto sales nationwide, also is a weak spot or an opportunity for the company to pursue more business in the future.

Nonetheless, Pacific demonstrated healthy organic business growth as it discussed higher lottery sales resulting from higher jackpot prizes and additional draw for Lotto, increased Keno terminal rollouts and higher instant ticket sales resulting from increased public awareness—all as part of its recent performance.

Using historical price-sales average, 15% margin, with shares outstanding growing at the same rate as in 2016, would leave a price per share of 10.41 Php compared to 10.98 at the time of writing.

Watching from the sidelines and observing Pacific’s share to drop could be a long patient wait, but at the current price of 10.98 Php, Pacific is a hold.

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

Too Hot Too Pass? Cemtrex

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Cash flow yet to help Cemtrex to be attractive
Stock: Cemtrex (ticker: CETX, CETXP)

Cemtrex, a world-leading industrial and manufacturing company, recently provided announced its record date for its preferred stock (ticker CETXP). For one thing, the preferred stock has dropped like a hot potato or 33.5% since its issuance early this year. More attractive is this preferred stock is paying cumulative dividends at the rate of 10% of the purchase price per year (10-K). Having traded at $6.65 a share and a purchase price of $10 already indicated a good amount of assured safety, and the double-digit percentage cumulative dividend payouts on top should surely make a conservative investor salivating at this point.

But why? Why has the preferred stock fallen to such bargains.

One reason could be the company’s recent blunder whereby it has been subjected to serious disservice to its shareholders. According to a Seeking Alpha article published in February, that Cemtrex’s founder, Aron Govil, was secretly paying promoters via an undisclosed entity to promote the company’s share price and worst, the article claimed that Cemtrex pays its auditors $20,000 per year to sign off financials.

According to filings, approximately 50.0% of Cemtrex’s outstanding voting equity is beneficially held by combination of Aron Govil and Saagar Govil the company’s CEO. This ownership makes it impossible for the public stockholders to influence the affairs of the company.

Meanwhile, the New York-based company reported a rather still impressive 54% year over year growth in its revenue to $87.7 million for the recent nine months operations that ended in June while having a recorded a contrasting 9.6% drop in profits to $2.7 million.

Cemtrex appeared to have recorded higher cost of revenue, 50% year over year, and another 70% higher operating expenses in the recent period resulting to lower profits in the period.

Cemtrex
According to filings, Cemtrex was incorporated on April 27, 1998, in the state of Delaware under the name “Diversified American Holdings, Inc.” The Company subsequently changed its name to “Cemtrex Inc.” on December 16, 2004.

Cemtrex is a leading diversified technology company that operates in a wide array of business segments and provides solutions to meet today’s industrial and manufacturing challenges.

The company provides electronic manufacturing services of advanced electric system assemblies, provides instruments & emission monitors for industrial processes, and provides industrial air filtration & environmental control systems.

In 2015, Cemtrex acquired Advanced Industrial Services Inc, an installer of high precision equipment in a wide variety of industrial markets such as automotive, printing and graphics, industrial automation, packaging and chemicals, for a purchase price of approximately $7.7 million.

In 2016, the company acquired at the purchase of approximately €9 million a machinery and equipment, and the electronics manufacturing and logistics businesses of Periscope, GmbH. Periscope is focused on electronic manufacturing services primarily for the major German automotive manufacturers, including Tier 1 suppliers in the industry, as well as for industries like telecommunications, industrial goods, luxury consumer products, display technology, and other industrial OEMs.

In early September, Cemtrex announced an exchange offer to acquire Key Tronic Corporation in an exchange offer. Key Tronic has similar business with Cemtrex’s EMS business and is engaged in designing, prototyping and manufacturing electronic components in the most advanced and cutting-edge technologies.

Sales and profits
In the past three years, Cemtrex recorded an impressive 90% revenue growth average, profit rise average of 159%, and profit margin average of 5.3% (Morningstar)

Cash, debt and book value (equity)
As of June, Cemtrex had $13 million in cash, and $13 million in debt with debt-equity ratio 1.5 times compared to 0.35 times a year earlier. Overall equity rose $24 million to $37 million while debt fell by $7 million.

Cash flow
In the recent nine months operations, Cemtrex had cash outflow from operations of $1.16 million compared to $4.9 million a year earlier. Cash outflow was mainly a result of higher outflows in relation to the company’s deferred revenue, inventory, sales tax payable, and accrued expenses.

Capital expenditures were $642 thousand resulting in free cash outflow of $1.8 million compared to $4.52 million a year earlier.

Meanwhile, Cemtrex was able to raise $12.82 million in net proceeds from subscription rights offering and allocated $1.8 million in debt repayments and $528.6 thousand in dividend payouts in the period.

The cash flow summary
In the past three years, Cemtrex allocated about $11 million in capital expenditures, raised $23 million in debt (net repayments and other financing activities), and generated $0 free cash flow.

Conclusion
Setting aside possible and potential damaging reputational claims as has been provided, Cemtrex’s recent strong growth may also be supported by the company’s recent acquisition activities.

Interestingly enough, Cemtrex seemed to exhibit prudence while having taken no goodwill/intangibles in its balance sheet. Cemtrex also has not generated attractive free cash flow figures in recent years.

Analysts had an average buy recommendation on Cemtrex with a target price of $4.50 per share vs. $3.21 at the time writing. Asking a 40% discount from the average revenue estimates this fiscal year multiplied with three-year PS average indicated a per share figure of $3.4.

In summary, Cemtrex is a hold.

Quotes
Saagar Govil, Chairman and CEO of Cemtrex (second quarter)
“We reported a 61% increase in total revenue to $30.5 million for the second quarter of fiscal year 2017. This growth was driven organically and through the acquisitions we completed within the last year. There are significant opportunities for us to continue to grow in fiscal 2017 and beyond as we make additional strategic investments in our existing businesses and look to complete synergistic acquisitions.”

“Looking ahead, customers’ programs are steadily filling our industrial and electronics manufacturing pipelines for the remainder of the year, putting us on track to maintain planned growth for the balance of fiscal year 2017.”

“As Cemtrex continues to grow, we are positioned to build shareholder value even further. We do not believe the valuation of the Company’s stock fully represents the progress we have made over the past year. As a result, the Board of Directors utilized different financial tools, including a stock buyback program and paying dividends to common and preferred shareholders. We believe these actions benefit our existing shareholders, while also attracting a broader shareholder base.”

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

Juicy Yields By a Mortgage REIT: Invesco Mortgage Capital

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An attractive dividend provider is a hold at the moment

Stock: Invesco Mortgage Capital (ticker IVR) 

The Maryland-incorporated REIT focused on residential and commercial mortgage-backed securities and mortgage loans recently declared a 2.5% increase in its dividend. Initially, this could be just easily taken for granted, but at 9.4% dividend yield, 0.9 PB ratio, and a mouth-watering 3.7 PE ratio should appeal to even the most conservative investors.

These valuations were not always these consistent and historical annual losses have indicated that the current attractive valuations may not hold or maybe even irrelevant. So it could be more rational to simply assess Invesco’s balance sheet.

As of June, Invesco had $64 million in cash and cash equivalents, and $2.05 billion in long-term debt with debt-equity ratio 0.8 times compared to 0.93 times a year earlier. Overall long-term debt rose $178 million while equity shrunk by $130 million to $2.2 billion.

In addition, Invesco carries no goodwill nor intangibles in its assets but $16.08 billion (96.5%) of its assets in mortgage-backed and credit risk transfer securities. These assets vary in figure in recent years as it had shown a decline of 4.7% in total in the past three years.

Invesco Mortgage Capital

According to filings, Invesco Mortgage Capital is externally managed and advised by Invesco Advisers, Inc., its Manager, a registered investment adviser and an indirect, wholly-owned subsidiary of Invesco Ltd., a leading independent global investment management firm.

Further, Invesco Mortgage’s objective is to provide attractive risk-adjusted returns to its investors, primarily through dividends and secondarily through capital appreciation. Its objective, the company primarily invests in the following:

Agency RMBS (41% of Invesco Mortgage equity)

-Residential mortgage-backed securities that are guaranteed by a U.S. government agency such as the Government National Mortgage Association or a federally chartered corporation such as the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation (Agency RMBS).

Commercial Credit (2; 33% of equity)

-RMBS that are not guaranteed by a U.S. government agency (non-Agency RMBS).

-Credit risk transfer securities that are unsecured obligations issued by government-sponsored enterprises (GSE CRT).

Residential Credit (3; 26% of equity)

-Commercial mortgage-backed securities (CMBS).

-Residential and commercial mortgage loans

-Other real estate-related financing arrangements.

What is more attractive is that Invesco Mortgage has elected to be taxed as a real estate investment trust (REIT) for U.S. federal income tax purposes under the provisions of the Internal Revenue Code of 1986. To maintain its REIT qualification, the company is generally required to distribute at least 90% of its REIT taxable income to its stockholders annually.

As per filings, the company conducts its business through an IAS Operating Partnership LP (the Operating Partnership), as its sole general partner.

As of June 30, 2017, the REIT owned 98.7% of the Operating Partnership, and a wholly-owned subsidiary of Invesco owned the remaining 1.3%. Invesco Mortgage also has one operating segment.

Invesco Mortgage’s operating results can be affected by a number of factors and primarily depend on the level of our net interest income and the market value of its assets.

Net interest income

The company’s net interest income, which includes the amortization of purchase premiums and accretion of purchase discounts, varies primarily as a result of changes in market interest rates and prepayment speeds, as measured by the constant prepayment rate (CPR) on the company’s target assets. Interest rates and prepayment speeds vary according to the type of investment, conditions in the financial markets, competition and other factors, none of which can be predicted with any certainty.

Meanwhile, the market value of Invesco Mortgage’s assets can be impacted by credit spread premiums (yield advantage over U.S. Treasury notes) and the supply of, and demand for, target assets in which the company invests.

In the first half, Invesco Mortgage’s net interest income rose 8.3% year over year to $169.2 million brought mostly by an 8% decline in interest expenses and a 2.3% rise in interest income. Net interest margin, meanwhile, was at 1.94% compared to 1.85% a year earlier.

Book value

Invesco Mortgage calculates its book value by deducting preferred shares in its equity divided by all diluted shares outstanding. The company’s book value per share as of June grew 4.5% year over year to $18.27 a share.

Cash flow

In the first half, Invesco Mortgage’s cash flow from operations declined by 4.6% to $154.4 million. In addition, dividends and distributions represented 66% of its cash flow from operations.

The REIT does not have capital expenditures but has allocated net $895.5 million in the urchase of mortgage-backed and credit risk transfer securities for the period and raised $63.2 million in repurchase agreement proceeds.

Repurchase agreements are short- and long-term borrowings made by Invesco Mortgage to finance its investments. Under repurchase agreement financing arrangements, certain buyers require the borrower to provide additional cash collateral in the event the market value of the asset declines to maintain the ratio of value of the collateral to the amount of borrowing.

Conclusion

Invesco Mortgage’s recent half operations, including the company’s net interest income and book value performance, strongly indicated a healthy appreciation of profitability for the company.

It is important to highlight though that the REIT has experienced a slow decline in its overall net interest income in recent years, but interest expenses has shrunk faster therefore leading to a supportive net interest income figures.

Average analysts have an overweight recommendation on Invesco Mortgage with a target price $17.58 a share vs. $17.12 at the time of writing.

In summary, Invesco Mortgage is a hold with $17.5 target.

Quotes

 John Anzalone, Chief Executive Officer (second quarter results)

“Our portfolio was well positioned to benefit from market conditions during the second quarter.”

“Our diversified sector allocation and security selection led to favorable economic return performance and continued book value stability. We have maintained a steady dividend of $0.40 per common share for the last eight quarters. Our consistent approach and execution has generated core earnings covering our dividend in seven of those eight quarters.”

DisclosureI do not have shares in any of the companies mentioned.

 

Back to Growth: Affiliated Managers Group

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Stock: Affiliated Managers Group (ticker AMG)

Asset manager rewards shareholders with dividend payouts

Share price of Affiliated Managers Group has hovered near one-year highs in recent times as the $10 billion Florida-based asset manager delivered 1.4% revenue rise in its recent first-half operations and a more impressive 17.2% profit increase to $248.8 million resulting in 22.3% margin compared to 19% a year earlier.

The asset management group recorded $13.6 million investment and other income, and $1.3 million lower in operating expenses resulting in more profitability in the period.

Assets under management, a critical metric for asset managers, grew 19% year over year to $772 billion.

Nonetheless, Affiliated Managers Group outperformed the S&P 500 index nearly twice so far this year having generated 24.21% total gains compared to the index’s 13.33% (Morningstar).

Meanwhile, the company trades at a slight discount compared to its peers with PE 20 times vs. industry average 21.3 times, and a good 40% discount compared to its three-year average.

Affiliated Managers Group
Affiliated Managers Group was founded in 1993. As per company filings, the company is a global asset management company with equity investments in leading boutique investment management firms, which the company refers to as its “Affiliates.”

Affiliated’s innovative partnership approach allows each Affiliate’s management team to own significant equity in their firm and maintain operational autonomy.

Further, the company’s strategy is to generate shareholder value through the internal growth of existing Affiliates, as well as through investments in new Affiliates, and additional investments in existing Affiliates.

In addition, Affiliated provides centralized assistance to its Affiliates in strategic matters, marketing, distribution, product development and operations.

The company holds meaningful equity interests in each of its Affiliates.

In certain cases, Affiliated owns a majority of the equity interests while in other cases it owns a minority of the equity interests.

In all cases, Affiliate management retains a significant equity interest in its own firm.

In 2016, Affiliated generated 67% of its revenue in the United States, 26% in the United Kingdom, and the other in remaining other countries. Affiliated derives most of its revenue from asset-based and performance fees from investment management service.

According to filings, Affilated has determined to report just one segment from three in its previous fiscal year.

Sales and profits
In the past three years, Affiliated registered 0.09% revenue growth average, profit growth average of 9.5%, and profit margin average of 20.1% (Morningstar).

Cash, debt and book value (equity)
As of June, Affiliated Managers Group had $365 million in cash and cash equivalents and $2 billion in long-term debt with debt-equity ratio 0.73 times compared to 0.56 times a year earlier. Long-term debt fell by $105 million year over year while equity rose $681 million to $3.6 billion.

In addition, 48% of the company’s $8.6 billion assets were labeled as goodwill and intangibles.

Cash flow
In the first half, Affiliated’s cash flow from operations increased by 30% year over year to $444 million brought by higher profits, and cash flow from the company’s distributions of earnings received from equity method investments among others.

Capital expenditures were $7.2 million leaving the company with $437 million in free cash flow compared to $332 million a year earlier.

In addition, Affiliated allocated $354 million in debt reduction (net issuances/other financing activities), and dividends and share repurchases represented 39% of its free cash flow.

The cash flow summary
In the past three years, Affiliated allocated $77 million in capital expenditures, reduced its debt by $614 million net issuance/others, raised $565 million in share issuances, generated $3.55 billion in free cash flow, and paid out $638 million (mostly share repurchases) at an average payout ratio of 18%.

Conclusion
Affiliated did seem to exhibit a good turnaround in both revenue and profits. The company’s business generator and critical metric–assets under management–has been steadily growing in recent years.

Meanwhile, it is important to remember that the company had a poor performance in its prior year brought by its consolidation of Affiliate average assets under management at existing Affiliates. Investors should try to foresee if this trend would continue moving forward as this activity may potentially result in lower profits.

As of its recent filing period, Affiliated also exhibited a leveraged balance sheet and nearly half of its assets were labeled as goodwill and intangibles while having kept a relatively conservative payout ratio.

The company’s recent dividend payouts are welcoming for its shareholders as it has maintained this payout ratio in recent years.

Analysts have an average overweight recommendation with a target price of $201.33 vs. $179.87 at the time of writing. Multiplying previous PS multiples to the average revenue estimates with a 25% margin indicated a per share figure of $127.21.

In summary, Affiliated is a hold with $190 price target.

Quotes
Sean M. Healey, Chairman and Chief Executive Officer of AMG.
“AMG generated strong results in the second quarter across our key operating metrics, including Economic earnings per share of $3.33, positive net client cash flows, and a year-over-year increase of 19% in our assets under management, to a record $772 billion.”

“Through the ongoing execution of our growth strategy, including consistent alpha generation by our Affiliates, positive organic growth from net flows, and the continued success of our strategy to partner with the leading boutique firms worldwide, we have meaningfully increased the earnings power of our business.”

“During the second quarter, AMG generated positive net client cash flows of $1.8 billion, as ongoing strong demand for a wide range of alternative strategies from both institutional and retail clients was partially offset by continued net outflows in U.S. equities.”

“In a dynamic market environment, our Affiliates are well-positioned to outperform peers and benchmarks, building further on their long-term track records of leading investment performance. With our Affiliates’ outstanding offerings across attractive alpha-oriented product areas, we have excellent prospects for continued strong organic growth going forward.”

“Looking ahead, given the significant and growing scale of our global business, we are confident in our ability to continue to generate meaningful earnings growth through accretive investments in outstanding new Affiliates, while also consistently returning capital to shareholders through our quarterly cash dividend and share repurchases. With this disciplined commitment to capital allocation, along with the organic growth of our Affiliates, we are uniquely positioned to create long-term shareholder value.”

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

A Humbling Moment: Equifax

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Stock: Equifax (ticker EFX) 

A look at Equifax pre-crisis

“This is the most humbling moment in our 118-year history.

“We apologize to everyone affected.”

Chief Executive Officer Richard Smith wrote in an op-ed posted to USA Today’s website Sept. 12. (Bloomberg)

Equifax has been mired with ongoing troubles since its data breach that could have potentially exposed 143 million sensitive personal information. This sent Equifax’s shares down 34.85% as of Friday since the crisis hit.

To add, Equifax’s chief information officer and chief security officer are now leaving the company, and a group of attorneys general has asked for the company to stop selling its credit monitoring services.

Equifax also revealed on Friday that as many as 400,000 United Kingdom customers may also have been hacked (Bloomberg).

Morgan Stanley also provided a possibly much more dire outlook on Equifax having indicated a further 50% decline in the already wrecked share price.

All of these findings are turning worse and worse for Equifax as incrementally this is a direct assault on the company’s capability of taking good care of its clients’ personal information.

Equifax prior to recent blunder
Looking back, Equifax delivered healthy revenue and profit growth at rates 10% and 37%, respectively, as of its recent six months operations.

Equifax
According to filings, Equifax was originally incorporated under the laws of the State of Georgia in 1913, and its predecessor company dates back to 1899.

Equifax is a leading global provider of information solutions and human resources business process outsourcing services for businesses, governments and consumers.

The company has a large and diversified group of clients, including financial institutions, corporations, governments and individuals.

Equifax’s products and services are based on comprehensive databases of consumer and business information derived from numerous sources including credit, financial assets, telecommunications and utility payments, employment, income, demographic and marketing data.

Further, Equifax helps consumers understand, manage and protect their personal information and make more informed financial decisions.

The company also provides information, technology and services to support debt collections and recovery management. Additionally, Equifax is a leading provider of payroll-related and human resource management business process outsourcing services in the United States of America.

In 2016, Equifax generated 73% of its revenue in the United States, and the rest in other countries.

Equifax has four operating segments:

USIS
U.S. Information Solutions (USIS) — provides consumer and commercial information solutions to businesses in the U.S. including online information, decisioning technology solutions, fraud and identity management services, portfolio management services, mortgage reporting and financial marketing services.

In the first half, USIS grew 6.5% to $642 million or 38% of Equifax’s gross revenue and delivered an operating margin of 43.5% compared to 42.6% a year earlier.

International
International —which includes our Canada, Europe, Asia Pacific and Latin America business units, provides products and services similar to those available in the USIS operating segment but with variations by geographic region. In Europe, Asia and Latin America, we also provide information, technology and services to support debt collections and recovery management.

In the first half, International revenue grew 18.8% to $447.7 million (27% of sales) and operating margin of 17% compared to 14.1% a year earlier.

Equifax stated that it recorded better profitability in its international operations brought by reduction in costs related to its $1.9 billion acquisition of an Australian credit information company Veda Group, a gain on the sale of an asset, as well as a decrease in people costs.

Workforce Solutions
Workforce Solutions — provides services enabling clients to verify income and employment (Verification Services) as well as to outsource and automate the performance of certain payroll-related and human resources management business processes, including unemployment cost management, tax credits and incentives and I-9 management services and services to allow employers to ensure compliance with the Affordable Care Act (Employer Services).

In the first half, Workforce revenue grew 10.4% to $394.5 million (23% of revenue) and operating margin 45.2% compared to 43.9% a year earlier.

Global Consumer Solutions
Global Consumer Solutions — provides products to consumers in the United States, Canada, and the U.K., enabling them to understand and monitor their credit and monitor and help protect their identity. We also sell consumer and credit information to resellers who combine our information with other information to provide direct to consumer monitoring, reports and scores.

Revenue in the Global Consumer Solutions rose 1.1% to $204.8 million (12% of sales) and registered a margin of 28.4% vs. 26.1% a year earlier.
Sales and profits

Sales and profits
In the past three years, Equifax registered 10.93% revenue growth average, 11.6% profit growth average, and profit margin average of 15.6% (Morningstar).

Cash, debt and book value (equity)
As of June, Equifax had $404 million in cash and cash equivalents and $2.83 billion in debt with debt-equity ratio 0.94 times compared to 1.16 times a year earlier. Overall debt fell by $115 million while equity rose by $479 million to $3.02 billion year over year.

77% of Equifax’s $7.06 billion assets were goodwill and intangibles.

Cash flow
In the first half, Equifax’s cash flow from operations climbed 17.9% year over year to $329 million brought mostly by higher profits in the period.

Capital expenditures were $100 million leaving the company with $229 million in free cash flow compared to $197 million a year earlier.

The company raised $139 million in financing activities net repayments and borrowings while it provided 41% of its free cash flow in dividends.

The cash flow summary
In the past three years, Equifax allocated $406 million in capital expenditures, raised $1.12 billion, generated $1.75 billion in free cash flow, and provided $915 million in dividends and share repurchases at an average payout ratio of 53.8%.

Conclusion
Excluding recent events, Equifax seemed to be an excellent steadily growing profitable company. After a significant amount of share price drop and still trading at 3.7 times book value, Equifax still does look like less of a bargain.

Further, the company has a leveraged balance sheet accompanied by more than three-quarters in goodwill and intangibles having kept a somewhat conservative dividend payouts to its shareholders.

Average analysts estimates indicated an overweight recommendation with a target price of $141.36 a share vs. $92.80 at the time of writing. Applying four-year PB multiple average and a 20% margin indicated a per share figure of $80.

In summary, Equifax would be a very very cautious buy at $120 a share target price.

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

Ferrari: Italian Car Maker Speeds On

fer

(Image Source: Ferrari)

Stock: Ferrari (ticker RACE)

Strong business growth accompanied by leverage reduction makes Ferrari an appealing investment

Ferrari recently rolled out its $234,000 Portofino. According to Bloomberg, Ferrari aims to boost its sales to 9,000 cars in 2019, up from a target 8,400 this year.

Meanwhile, the Italian car company reported 17% revenue growth to €1.74 billion and a more impressive 48% rise in profits to €259.6 million.

In addition, Ferrari also sees its net revenue this fiscal year ending in December at more than €3.3 billion (vs. €3.11 billion in 2016), adjusted EBITDA of more than €950 million (vs. €880 million), and net industrial debt of ~€500 million.

Returns
Ferrari has incredibly outperformed the broader S&P 500 index so far this year has provided 90.47% total gains vs. the index’s 13.1% (Morningstar).

Cash, debt and book value (equity)
As of June, Ferrari had €422.9 million in cash and cash equivalents and €1.76 billion in debt with debt-equity ratio 3.4 times compared to 23.4 times a year earlier. Debt fell €728 million compared to the same period last year while equity climbed 381% to €510 million.

Ferrari also had 30% of its assets in goodwill and intangibles.

Cash flow
In the first half, Ferrari’s cash flow from operations declined by 13% year over year to €275 million brought by higher cash outflow in its inventories, receivables from financing activities, operating assets and liabilities, finance costs, and income taxes paid.

Capital expenditures were €79 million leaving Ferrari with €119 million in free cash flow compared to €156 million a year earlier.

The company also allocated €158 million in debt repayments (net any borrowings and financing activities).

The cash flow summary
In the past three years, Ferrari allocated €1.03 billion in capital expenditures, reduced overall debt by €884 million (net issuance/financing activities), and generated €1.11 billion in free cash flow.

Conclusion
Ferrari certainly has been attractively increasing its business and profitability as of its recent months of operations. This helped propagate its stock in stratospheric heights surpassing the $100 share mark valuing the company more than $20 billion with projected sales of $3.9 billion this year.

The luxury car maker also has markedly improved its leveraged balance sheet and appears to continuously aim to do so.

Analysts have an average hold recommendation on Ferrari’s shares with a target price of $110.78 a share vs. $110.05 at the time of writing. Applying past multiple averages to company’s current sales projection with a 10% margin indicated a per share figure of $69.44 a share.

In summary, Ferrari is a hold with $106.65 per share value.

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

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.