Will This Private Equity Stock Continue to Rise?
Alex is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Many investors want to be able to invest in private equity deals. However, if you do not have $1 million in cash lying around, your options are limited. Nonetheless, there is a small number of private equity firms that are publicly traded, hence allowing small investors to buy into some of the action. One of the most remarkable publicly-traded PE firms is Apollo Global Management (NYSE: APO), which is a global alternative asset manager that, aside from investing in private equity, also invests in capital markets and real estate. The stock has had remarkable earnings growth and the stock's price has also had a terrific run. So, should investors buy Apollo? Or is it too late?
With regards to valuation, the stock is currently trading at 12.47 times earnings, which is about the market average. While some competitors like Blackstone (NYSE: BX) trade at much higher valuations (the stock has a P/E of 53), others like Kohlberg Kravis Roberts (NYSE: KKR) are slightly more attractive than Apollo from a current P/E perspective (8.73 vs 12.47). When looking at forward earnings, Apollo becomes more attractive, as it trades at a forward P/E of 7.99, only slightly higher than Blackstone's 7.86, and certainly lower than Kohlberg's 8.21. However, it is when analyzing the stock's PEG and P/B ratios that a clear advantage can be observed. Apollo's price-earnings to growth ratio is only 0.73 (compared to Blackstone's 3.90), and its price-to-book ratio is 1.20, lower than that of its two main competitors. All in all, these figures suggest that the stock could be undervalued, especially when it comes to future earnings and growth potential.
Wall Street analysts are mostly neutral on Apollo: The average analyst recommendation is 2.20 (overweight-hold), and the average price target for the stock is $25.25, which implies a potential upside of 3.24%. Analysts are more bullish on both Blackstone and Kohlberg, with average recommendations of 1.90/1.80 (buy-overweight), and average price targets that imply slightly higher upside potentials than Apollo's (4.57% for Blackstone and 7.67% for Kohlberg).
Apollo Global Management pays a significant dividend to its shareholders. As with many other publicly-traded private equity firms, these distributions vary every quarter based on earnings, so an annual dividend yield is harder to calculate*. However, assuming it maintains its $1.05/share quarterly distribution, then the annual yield would be around 17%, clearly above the market and the group's average. The company has been paying a quarterly distribution to its shareholders since it started trading publicly in 2011. Current yields, however, are at record levels.
Price movements and momentum
The stock's price has rallied since last November: It has gone up more than 100%. The stock is also up more than 42% year-to-date. It is now trading about 10% off its 52-week high of $27.56, and 160.21% above its 52-week low of $9.49. Historically, the stock reached a low of $10.05 in September 2011, and a high of $27.56 last Tuesday. Despite having fallen almost 10% during the second half of this week, the stock seems to be at near-record levels, and it will probably linger at these levels in the near future.
Technical indicators indicate that the stock has in fact entered oversold territory (the stock has a stochastic value of 11.4, values below 25 indicate oversold conditions) and thus might be poised for an upward correction on Monday.
Earnings looking forward
The stock's strength lies in its remarkable earnings growth. Apollo was able to grow its AUM (Assets Under Management) almost 60% in 2012 (from $75B to $113B), and was able to boost Q4 earnings by a whopping 1,565% compared to Q4 2011. Perhaps most importantly, Apollo is constantly beating analyst estimates by a big margin. In fact, for the last year, Apollo has been able to beat analyst EPS estimates by an average of 99%. Q/Q EPS are actually up 2,064%.
The big question for investors is whether Apollo can continue to deliver such earnings growth or whether it will enter a period of consolidation. Private equity is a volatile arena, and just as past earnings have been stellar, next quarter's earnings could disappoint many if growth slows down. Apollo's success will lie in its ability to find attractive deals and take advantage of the low-rate environment. Cheap money is not about to end any time soon, so perhaps we have entered a golden age for private equity firms. In fact, looking at the most recent earning estimates for Apollo, analysts seem to be quite optimistic. Maybe Apollo will continue to rise this year.
This prospect, coupled with attractive valuations and a juicy dividend, certainly should make investors consider this stock. This week's pullback could be a good entry point for a long position, but investors should keep the risks of private equity in mind before they commit.
Alex Bastardas has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!