Profiting from Wealth Management
Declan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Envestnet (NYSE: ENV) is an unusual one. It's a big board stock, with a modest Market Cap (just below $0.5 billion), and typically trades just 70K shares a day. The stock does not appear to be widely followed. However, buying volume has picked up in the last few weeks, going as far as to trade 350K in a single day, along with a break from the $11-12ish range it has held for months. What has awoken this stock from its slumber?
The stock does carry the whiff of a 'failed' IPO. A promising launch in 2010 saw the stock price almost double in the space of 6 months. However, earnings realities soon hit home, and a series of lowered earnings projections in 2011 (which the company beat and were all profitable) pushed the stock back towards its IPO price. The stock effectively flat-lined from that point, until recent buying sent the stock above $13. This move higher may have caught some investors out, who had perhaps anticipated lower prices following some insider sales.
The outlook for next quarter is also expected to pick up. After four quarters of declining income projections, analysts are looking for EPS of $0.04 compared to $0.02 they had projected for the most recent quarter. This will still below the $0.10 which was projected from the same quarter last year. Revenues for the most recent quarter came in at $38 million. Although reported net income showed a loss of $668 thousand, off the back of increased administrative costs. This led to a net loss of -$0.02 for the quarter, compared to $0.07 for the previous quarter, and the $0.02 analysts had projected.
Envestnet trades at a lofty P/E in the 100s. This is a significant premium to a Mid-Cap competitor like LPL Financial Holdings (NASDAQ: LPLA) and its P/E of 20. LPL Financials has a more diversified income base, offering services beyond just software. This enabled LPL Financial Holdings' to report nearly $1 billion in revenues for the most recent quarter, leaving it with a healthy net income of $39.5 million. LPL Financials' net income is roughly equivalent to Envestnet reports as total revenue! But then again, 43% of LPL Financial Holdings Market Cap is tied to Long Term Debt, while Envestnet carries no debt. So with Envestnet you are very much looking at a small - if neat - component of the overall wealth management business.
Envestnet and LPL Financial Holdings are both benefitting from the continued shift towards Independent Advisors, as assets leave larger brokerage firms. LPL Financial Holdings recently added Washington Wealth Management, and its $750 million in client assets. This followed on the heels of the $500 million of client assets held Delaware Valley Financial Group. Increased demand for wealth management back-end services will help Envestnet too.
On Envestnet's part, in the early part of 2012 it company acquired Tamarac, a company which enabled RIA's to deliver customized account management solutions to their clients. Tamarac has a competitive product, comparable to products offered by larger competitors, and favourable (if limited) review. Envestnet later acquired Prima Capital Holdings, which gave the company access to major U.S. bank clients of Prima Capital. So it too is well positioned to take advantage in the drain from the larger firms, but can also look at opportunities to provide for them too.
If the likes of Envestnet is too small for your tastes, another alternative in the wealth management space is SEI Investments (NASDAQ: SEIC). SEI manages or administers $424 billion in assets, and comes with kudos within the industry. The stock has spent the past couple of years range bound, keeping it off radar of most people. Although, historically it has flown far ahead of the S&P, helped in part by its dividend, although a current yield of 1.4% it's hardly stellar.
The company has a history of underperforming against analyst expectations, although misses have been relatively minor. Recent Q3 Earnings came in at expectations. The average assets under management increased 9% to $127.8 billion, compared to $117 billion for the first nine months of 2011. 'Sales events' for the first nine months of 2012 were also "significantly higher". However, the S&P had risen 27% for the same period, so the growth figures are somewhat disappointing. A loss in clients likely accounts for some of this discrepancy, rather than a sharp underpeformance in the return of the assets under management. Whether their sales team deserved the $8.1 million increase in sales compensation given this underperformance is open to debate.
The next couple of quarters could be tricky. Post-election in 2008 saw a greater than 30% fall in the S&P through to the end of Q1 2009 on the election of Obama. While the economy is in better shape than it was in 2008, market participants looking for a Romney victory will be disappointed if their man doesn't make it. Not helping are analysts who have set the bar higher for Q4; anticipating $0.32 earnings-per-share compared to the recently reported $0.29. This unwanted pressure increases the risk for a significant earnings miss over the next two quarters.
There was no news on major client acquisitions. Although one nugget of information was the sharp growth of asset management outside of corporate pensions. This likely reflects the shift towards the independent, boutique investment firm and the demand for front and back-end services to support this. Such growth can only be good for all three of the firms mentioned here.
fallond has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend SEI Investments. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.