Credit: Shutterstock photoFortress Investments ( FIG ) shares are tremendously undervalued. The firm trades at a deep discount to a reasonable value even though it is recently showing growth in revenues, EPS and balance sheet value. It is also transitioning from the legacy private equity model into a permanent capital model. Management looks like it is very shareholder friendly with signficant dividend payouts and stock buybacks being executed. The firm has a total of $70 billion of assets under management, although the configuration isn't ideal. There is a lot of upside earnings potential because of embedded value investments and optionality because of incentive payouts.
Assets under management are a key component of Fortress' value and it is divided across asset classes as follows:
The firm is transitioning away from private equity where its reputation has suffered, and actively marketing its credit and real estate funds where it has a good track record. In addition it is growing its permanent capital exposure. Its fixed income business is barely large enough to break even. The firm could benefit if this division would grow as much of the additional fees would show up on the bottom line, but alternatively, the unit could be sold to someone with more scale.
The value of asset management firms goes up and down and currently they are very much out of favor. Just last month I wrote up three of Bobrinskoy's idea s in the space. You can value them by AUM and typically they are worth somewhere between 2% and 8% of AUM with the mean lying closer to the bottom of that range. In general fixed income and institutional investments are worth less and PE, hedge-funds, retail, equity and special investments are worth more. Think higher fees (incentive fees, etc.) = more valuable and hard to withdraw = also more valuable. Even if you would value the firm at just 2% in the very bottom of the range, it is worth $1.4 billion, which is roughly 40% higher than its market cap.
However, the firm also holds cash, short-term and long-term investments on its balance sheet and little debt. If I subtract liabilities from its assets, that's still equal to its market cap. You could argue these assets are required as seed money in order to raise money for its funds, but I don't think it's that convincing. The firm is moving away from PE and into more permanent capital vehicles and even if it is necessary, it does earn income on these investments in addition to its AUM fees. Obviously earnings on the company's own capital are much higher.
The company has significant insider ownership at 10%. It pays out a 7% dividend and is engaging in share buybacks. Gurus like Howard Marks ( Trades , Portfolio ) and Chuck Royce ( Trades , Portfolio ) hold the shares.
Disclosure: Long FIG.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
