current price: $184.36 target price: $160-$166 · pdf fileboutique investments firms in which...
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Current Price: $184.36
Target Price: $160-$166
Analysts
Josh Marquez
Zo-Ean Lee
Qiqi Shi
Vignesh Das
Company Overview
Affiliated Managers Group (AMG) is a global asset management
company with equity investments in leading boutique investment
management firms. AMG has ownership stakes in some affiliated
investment boutiques. These affiliates provide a comprehensive
and diverse range of active return-oriented strategies and products
to achieve their customer's’ investment objectives.
Stock Performance Highlights
52 week High $179.85
52 week Low $198.40
Beta Value 1.80
Average Volume 276.26k
Share Highlights
Market Capitalization 10.247b
Shares Outstanding 56.58m
EPS 9.03
P/E Ratio 20.42
Dividend Yield 0.43%
Company Performance Highlights
ROE: 14.49%
ROA: 8.45%
Total Revenues: 2,194.60m
Financial Ratios
Current Ratio: 1.28
Debt to Equity: 41.36%
Key Investment Highlights
● Growing assets under management (AUM): During
the same month the company’s 20th anniversary of its
NYSE listing AMG reached a milestone surpassing 804
billion AUM the key component of revenue growth. As
AMG continues to expand its affiliated partners it will
absorb the invested assets into its pool of revenue
sources. This effect compounded with record market
performances that have been recorded thus far this year.
● Expanding distribution platform: AMG gained 5
more affiliates adding those firms to its global platform
of investment strategies. These partnerships are key to
expansion, access, and growth. Access to these
strategies offer new products to clients. Broadening the
spectrum of investment strategies. Ultimately growing
AUM.
● Boutique alternative investment strategies: The
Boutique investments firms in which AMG has
developed partnerships bring a key competitive
advantage to their platform. They offer unique
investment strategies that would otherwise be
inaccessible or at least difficult to utilize without the
global distribution platform AMG is able to provide.
This attracts investors that are seeking an edge in their
strategy.
● Heavily dependent on market returns: AMG high
raw beta of 2.175. Negative net income in 2008 during
the financial crisis and revenues shrunk as expected.
Naturally a more volatile stock for a company with a
revenue stream dependent on AUM. It's only logical
AMG could would fare worse in economic downturn.
As an actively managed firm it is possible that would
perform better than passive in uncertain market
conditions as some competitors are more passive
aligned firms.
● Changing Industry: As more investors become more
aware of the cost advantages of passive investing the
competition forces expense ratios down on investment
products. Lower expense ratios will cut into the profits
of actively managed investment like the ones provided
by AMG and affiliates.
One Year Stock Performance
Source: Yahoo Finance1
Executive Summary Our team of analysts have recommended a SELL rating for
Affiliated Managers Group, Inc. stock. Our decision was based on
many aspects of the changing economic landscape and the effect it
will have on AMG. The company has several key competitive
advantages that will keep AMG as a stable company, but we
believe the best of its growth has passed. AMG is ultimately driven
by the assets under management which has grown significantly in
recent years, but this growth will slow as the economic
environment changes. AMG offers a unique advantage as it offers
unique investment products and strategies over its global
distribution platform. These advantages will help the growth of
AMG relative to competitors, but ultimately the majority of its
growth are favored from stock market returns.
Economic Analysis Real Gross Domestic Product (GDP)
Real gross domestic product (GDP) is a measurement of the
inflation-adjusted value of all goods and services by a nation’s
economy in a given year.2 According to the advance estimate
released by the Bureau of Economic Analysis, real GDP increased
3.1percent in the second quarter, and real GDP increased 3 percent
at an annual rate in the quarter three of 2017.3
Source: Bureau of Economic Analysis3
Compared to 2 percent increased in the second quarter, the third
quarter is slightly decreased by 0.1 percent. The deceleration in
real GDP in the third quarter primarily reflected decelerations in
personal consumption expenditures (PCE), in nonresidential fixed
investment, and in exports that were partly offset by an
acceleration in private investment and a downturn in imports.3
The financial sector has high correlation to GDP as the sector
relies on individual’s abilities and willingness to invest
money. When GDP is high, more people are able and willing
to manage their money in financial investments. Therefore,
we generally expect companies in the financial sector to
perform favorably.
Inflation:
A measure of the purchasing power of each unit of currency.
It is usually measured in Consumer Price Index. Inflation will
generally affect the consumer purchasing power, money
supply, stock price, stock returns, and economic growth. The
change of variable will cause the fluctuation of the supply
and demand in financial sector. Focusing on this variable can
help companies to identify the trend of the industry as well as
the financial investment and the return that companies
invested.
Source: Trading Economics4
The inflation rate is projected to increase slowly in the future.
Per the above data, the indication is that inflation rate is
projected to raise around 2% in short term and will increase
to 2.5% in 2-3 years. In short term, higher inflation rates
benefit the financial and real estate industry since it improves
the purchasing power for customers to invest more money in
the industry that could increase the profits of financial
companies that have assets in the industry.
Based on the inflation rate forecast, the inflation rate is
increasing slowly in the future. Higher inflation rates benefit
the financial sector since it improves the purchasing power
for customers to invest more money in the industry that could
increase the profits of financial companies that have assets in
the industry.
Interest rates:
Interest rates are critical to the financial sector. Increases in
interest rates directly increases the yield on banks’ cash
holdings from customer balances and business activities, in
which increases the profits of the bank. In addition, low
interest rate will make money less expensive to borrow and
will encourage more people and businesses to borrow money.
Therefore, when interest rates are expected to rise, people are
more likely rush out to borrow money.
Industry Analysis Industry Overview
Asset management refers to an active management of an investor’s
portfolio by a financial services company. The institution offers
investment services along with trading and alternative securities
offering and first access to public offerings that are typically not
provided to the average investors5.
Source: BCG Global Asset Management6
Current product lines: hedge funds, mutual funds, private equity,
venture capital, and other financial investments
Revenue streams:
According to the BCG report “The value of global AuM grew by
7% in 2016, to $69.1 trillion from $64.6 trillion. This was a
marked improvement over 2015, when it rose only 1%, and it
exceeded the average annualized rate of 5% from 2008 through
2014.” Because of the rising market values, the global asset
management industry grew by 7% which would be a great
condition for the industry.6
Source: BCG Global Asset Management6
Recent Development and Industry Trends:
Asset management industry has not performed well in the recent
year. The current business model and product of this industry are
going towards to the edge. As the demographic changed, the
preference of customer shift towards to technology based.7 The
development of FinTech that combines data and artificial
intelligence shapes the industry to be more digital and data driven8.
Majority asset management companies are facing the pressure of
the increasing manager fees and the regulation obligation on
managers that hinder industry to develop business and increase
operational risk9. Embedding Fintech in the industry is considered
as the new trend and strategy of most of the lead companies in the
industry. Firms start to move their old style of business
operation to IT based model for the sake of bring more
transparency to investors and regulation7. Aum firms are
seeking opportunities to adapt blockchain, learn artificial
intelligence and machine, develop robo-advisers and robotic
process automation to improve their efficiency on services
and product10.
Markets and Competition:
Current Climate:
The industry is affected by three factors: regulatory burden,
new financial technology entry and customer preference.
Regulatory Burden: SEC has increased expectation on
enhance transparency on the information disclosure,
compliance, conduct standards and etc. to monitor the
industry and control risk. Moreover, the DOL has
strengthened their restriction on conflict of interest of
advisers and asset managers11.
Financial Technology: As the technology develop,
digitalization is being introduced to many asset management
firms. Blockchain, Artificial Intelligence implement, machine
learning, robo-advisers and robotic process automation are
becoming the trend for asset management firm to switch their
internal operation11.
Customer Preference: Millennials gradually become the
dominant investors who are more favor using the social
media and digital technology to interact their investment.
Passive approach investments seems to be the popular the
choice in the current demographic. Providing service and
product based consumer preference is a good strategy to main
market share and client relationship11.
Major players in this industry:
BlackRock(BLK)
Vanguard
State Street Global Advisors
Fidelity Investments
J.P. Morgan Asset Management
BNY Mellon Investment Management
PIMCO
Of all the major players, BlackRock is the best positioned in
the asset management industry since it is the world’s largest
asset manager with $5.7 trillion in asset under management
as of July 201712.
Five Forces:
1. Threat of new entry: Low
Even though new asset management companies coming up
can be a threat to the existing company, the threat is
relatively low since the asset management industry not only
requires skills, professional techniques and efficient data structures
to build up clients’ confidence and the company’s reputation.
Therefore, it is comparably difficult for the new entry to establish
these standards in short term.
2. Threat of substitutes: Medium
Even though investment requires professional skills and
diversifications to reduce the risk of the investments.
There are the individual investors who would like to manage their
own investments without asset manager’s advisory. Additionally,
there are large volume of funds flowing into passively managed
funds.
3. Bargaining power of customers: High
According to a recent report from Deloitte, shifts in investor
buying behavior is a force that can shape the asset management
industry. Both institutional and retail investors are concerning
about fee and transparency. The leading firms should try their best
to develop efficient data structures to facilitate accounting and
reporting to enhance the customer's confidence in investing their
money with the asset managers13.
4. Bargaining power of suppliers: Moderate
Information industry market research is a significant resource for
the asset management industry. The competition between the
suppliers are very high among two major players that take the
greater market share. According to the Baron, the Bloomberg's
share was 33.33 percent and Thomson Reuters’ share was 24.29
percent. The rest is divided among smaller players. Even though
there are only two majors player they keep each other in balance14.
5. Industry Rivalry: Moderate
According to the Forbe The top three companies including
BlackRock, Vanguard, and State Street dominates 70% of market
share in the global ETF assets industry. Even though they earn
most of the market share in the global ETF assets industry, there is
still a big competition among the three companies15.
Industry leaders and followers:
Industry Leaders (Based on Market Cap) :
● Diamond Hill Investment Group, Inc (DHIL)
● Ameriprise Financial Services, Inc. (AMP)
● Franklin Resources (BEN)
● BlackRock, Inc. (BLK)
● The Blackstone Group (BX)
Industry Followers (Based on Market Cap):
● KKR & Co.L.P. (KKR)
● Janus Henderson Group (JHG)
● Apollo Global Management, LLC (APO)
● Eaton Vance Corporation (EV)
Sources: Nasdaq16
Financial and Operating Metrics Ameriprise Financial,
Inc (AMP)
Source: Yahoo Finance17-21
Comparable Company Price Chart
Sources: Yahoo Finance17-21
Per the information on the charts, Diamond Hill Investments
GrouP, Inc. (DHIL) is considered as the lead in terms of
highest sales, net income, profit margin and not any debt
issue. However, it is the best position company based on the
last three months stork price data. Comparing with other
industry peers, it stays low and less fluctuations due to the
less outstanding shares in the stock price in general among
others. BlackRock seems have a potential to grow and lead
the industry based on the outlook of economic and industry.
It has small market cap than DHIL and relative high on EPS,
P/E ratio, profit margin and dividend payout with 160.98
million outstanding shares. Besides, it has smaller percentage
of price change and it has uptrend grow on the stock price
from historical data, which indicates the stock is growing
relative stable in the slowly grow economic.
Catalysts for Growth/Change:
Economic Pressure: Declaration on GDP growth rate leads
the capital markets to have low returns. Asset managers are
facing huge pressure on maintaining and increasing revenues
on portfolios22.
Distributor Consolidation: Decreasing buyers motive the
industry to enhance relationship between financial advisor
and clients. Moreover, technology is gradually implemented
to replace old fashioned style of advising22.
Demand for new capabilities: The current product is having less
attractive to the market. New product development, like multi-asset
portfolio, illiquid strategies, quantitative strategies and etc, is
essential for the industry going forward22.
Shifting Value Chain: Demographic switching and high
accelerating development on technology drive the industry to
innovate on their operation to satisfy consumers’ demand22.
Investment Positives and Negatives:
Some investment negatives includes demographic shift, which
more and more investors are in younger age. Given that, those old
fashioned and services becomes hard to satisfy and need to updates
to meet the young clients. On the other hand, asset management
industry requires an efficient model and those model needs to
update with the current economic and trends. FinTech and AI
Robotic system can facilitate the industry to build a more efficient
and more accurate models, which will be a potential benefits for
the asset management industry.
Company Analysis Overview and business description:
Affiliated Managers Group (AMG) is a global asset management
company with equity investments in leading boutique investment
management firms. AMG has ownership stakes in some affiliated
investment boutiques. These affiliates provide a comprehensive
and diverse range of active return-oriented strategies and products
to achieve their customer's’ investment objectives. As of December
31, 2016, AMG managed 688.7 billion in over 550 investment
products across a broad range of active return-oriented strategies
and distribution channels23.
Corporate Strategy
AMG's strategy is to generate shareholder value through the
growth of existing Affiliates, as well as through investments in
new Affiliates and additional investments in existing Affiliates.
The firm also seeks to help its affiliate firms grow in value by
providing a centralized source of support for strategy, marketing,
distribution, product development and operations24.
Life Cycle
AMG is on the same trend in growth as the industry. The AUM
industry is currently in a growing state but the rate is decreasing.
Fee revenues continue to decline but there is an increasing ETF
market and there is a still strong growth in the asset management
fees which is related to the aging Baby Boomer generation25. The
company is adjusting to the increasing awareness of asset
management fees but are finding ways to keep revenues up and
slightly growing. It is possible that the U.S. government can undo
some regulation that had an effect on fee revenue. This would have
a positive effect on growth. At this moment the company is still
slightly in the growth stage.
Financial Summary
According to 10-K, AMG’s Adjusted EBITDA increased in
2016, but its Net income decreased by $36.7 million or 7%,
primarily due to an increase in other non-operating expenses
of $44.2 million relating to Imputed interest expense and
contingent payment arrangements. The increase in Imputed
interest expense and contingent payment arrangements was
primarily due to a $44.7 million non-cash gain on contingent
payment obligations recorded in 2015, which did not reoccur
to the same extent in 201623.
The other changes in Net income according to 10-K include
an increase in Equity method intangible amortization of
$24.9 million in 2016, primarily due to the full-year impact
of AMG’s 2015 investments in new Affiliates and the partial-
year impact of its 2016 investments in new Affiliates, offset
by a decrease of $28.6 million in Income taxes primarily due
to the decline in our share of Income before taxes23.
Products and Markets
Product Line and New Products
AMG’s affiliated firms offer more than 500 actively
managed investment products across asset classes and
investment styles, including a deep selections of U.S.
developed-market and emerging-market equity strategies,
alternative investment products, and fixed-income
strategies.28
Alternative investments include long/short equity strategies,
private equity strategies, infrastructure and energy
investments, multi strategy investment, hedge funds, and
other options.28
Investment Strategy Products
AMG uses its global distribution platform to offer a variety
of alpha global equity and alternative strategies to clients
around the world. The pie chart below shows the total
investment exposures to each type strategy by percentage.29
Source: Affiliated Managers Group Website23
Below are some of affiliated investment boutique firms,
categorized by strategy style, in which these investment
products originate.29
Source: Affiliated Managers Group Website23
The chart below demonstrates the flow of revenue with partnered
affiliates. The revenues come from the operations of the affiliated
investment firms in which AMG has ownership and distribute to
using their global platform. Revenue is shared according to the
structured partnership interest model.AMG then earns their share
of revenues as owners27.
Source: Affiliated Managers Group, Inc. (2016). 2016 Annual
Report.27
Revenues come from 2 sources which are asset based advisory fees
and performance based fees. Asset based advisory fees are
recognized as services rendered and are typically based upon a
percentage of the value of a client's assets under management.
Performance fees are assessed as a percentage of the investment
performance realized on the client's account. Performance fees are
only recognized when they are earned based on contractual
agreements. These fees will vary annually due to market
volatility27.
Market for the company’s products
AMG distributes its products and services through its direct sales
team or through consultants from around the world. It also has
retail distribution platforms through its wholly-owned subsidiaries,
which provide retail investors with access to AMG’s affiliate
investment service through registered investment companies30.
Marketing strategy and customer support
AMG adds to its investment funds and strategies buy
acquiring smaller firms from around the world. These
boutique firms are able to provide traditional and alternative
investment strategies. AMG aims to help these firms by
providing its global distribution platform as well as
centralized source of support for strategy, marketing, product
development and operations30.
Significant customers
Client Type:
-Institutional 59%
-Retail 27%
-High Net Worth 14%
Client Location:
U.S. Client 54%
Non-U.S. Client 46%
Source24
Production and Distribution
Distribution
AMG global distribution platform is a key strategy to AMG
growth and competitive advantage. By owning stake in
companies around the world it gives them access to
alternative investment strategies in global and regional
markets not normally available to investors. This ability to
connect clients with unique investments is a major advantage
for AMG.
Competition
Competitive environment
Affiliates compete with a broad range of domestic and
foreign investment management firms, including public,
private and client-owned investment advisors, firms
managing passive strategies as well other firms managing
active return-oriented strategies, firms associated with
securities broker-dealers, financial institutions, insurance
companies, private equity firms, sovereign wealth funds and
other entities that serve our three principal distribution
channels. This competition may reduce the fees that
Affiliates can obtain for investment management services23.
Major competitors
BlackRock Inc
Altaba Inc
Bank of New York Mellon Corb
Other Topics
Research and Development
AMG has done extensive research into the Boutique
advantage. Active vs passive. They analyzed over 1200
individual investment management firms around the world
and nearly 500 institutional equity strategies. They find 7 key
insights in their research summarizing the strong evidence that
boutiques have added value.
7 key insights to the Boutique Advantage
1. Boutiques broadly outperformed non-boutiques
2. Top-performing boutiques added more value for clients than
bottom-performing boutiques detracted
3. Boutiques created significant value versus indices
4. Top-performing boutiques generated exceptional excess returns
versus indices
5. Boutique strategies, on average, had a high frequency of
outperforming indices
6. Individual boutique strategies outperformed indices more often
than not
7. Boutique outperformance versus indices was persistent
Government regulation
Recent fiduciary changes to wealth management will affect how
the AMG operates their relationship with clients. AMG considers
themselves as fiduciaries already and see the proposed rule will
only harm investors because it shields them from a full disclosure
of information. It hampers the ability of asset managers from
acting in the best interest of plan clients31.
Valuation Analysis In our discounted cash flow an economic profit model analyses, we
determined that AMG to have a SELL rating. Our valuation found
the intrinsic stock price to be lower than the current price of
$182.86. We forecasted the future cash flows out to the year of
2021. This is less than a 5 year forecast. We chose this length due
to the nature of the industry. As an investment firm it performance
is very dependent stock market performance in which AMG’s
revenues have been dependent on. We predict a slowing stock
market and this will present a challenge to AMG’s growth.
We predict growth slowing down even as AMG aggressively
pursues new source of AUM. This is due to the slowing of the
stock market and increasing competitive forces of passive
investments forcing the AUM expense ratios down and cutting
revenues for AMG. We assume that the company is striving to
reach 1 trillion in AUM within the next 4 years and that they will
do so by the end of our forecast. Although, a sluggish stock market
presents a challenge to this milestone we believe that AMG will
achieve the 1 trillion mark due to its competitive advantage of
boutique investment firms and its global distribution platform.
These advantages will influence AMG’s growth rate to remain
Revenue Growth
The company’s revenue is driven by assets under management.
AMG continues to invest in partnering firms assets under
management grows. In 2016 AMG gained 4 new affiliate
investment firms and 8 new affiliates during 2014 and 2015. With
each new affiliate AUM grows accordingly. This growth
ultimately drives revenue. We forecasted the growth as percentage
of AUM. Historically the revenues have averaged 0.43% of total
AUM over the last 10 years. This average is also decreasing
as time progresses. This is due to the decreasing expense
ratios that are hindering growth. This factor along with the
expectation of a slowing stock market has lead us to
developing a decreasing growth rate over time.
Source: Affiliated Managers Group Website23
We begin with the growth rate of AUM at 8.78% and shrink
the rate by 4% over the next 2 years to 4.78%. This will level
off to 5% of continuing value growth. Revenues follow as
0.37% of total AUM.
Weighted Average Cost of Capital (WACC)
We calculated a WACC of 9.80% using our capital structure
of 81.60% equity and 18.40% debt. The WACC is derived
from the cost of debt and cost of equity that are explained
below.
Cost of Debt
To calculate our cost of debt, we use the risk free rate plus
the spread from the rating A3 to get the pre-tax cost of debt
of 3.74%. We then calculated the after-tax cost of debt by
multiplying the pre-tax cost of debt by one minus marginal
tax rate of 35%. The after-tax cost of debt we calculated for
AMG is 2.43%.
Cost of Equity
To calculate our cost of equity, we used the Capital Asset
Pricing Model (CAPM). The three variables we used to
calculate the CAPM are as follows:
Beta = 1.78
Market risk premium (MRP) = 4.81%
Risk-free rate = 2.88%
We calculated Beta by using AMG’s average weekly one-
year and two-year betas reported on Bloomberg. The market
risk premium equals was derived from Damodaran’s 12
month cash free yield. The risk free rate used reflects the
current yield on the 30-year U.S. Treasury.
Discounted Cash Flow & Economic Profit Model
By using the discounted cash flow and economic profit model, we
calculated a stock price for AMG of $163.10, which we believe is
an accurate representation of the company's intrinsic value. We
assume the CV growth rate of 5% using the WACC and Cost of
Equity based as we calculated from the above.
Dividend Discount Model (DDM)
We do believe the dividend discount model is a more accurate
representation of the current value of AMG and we refers the
model to evaluate the target price in the future. We calculated
AMG’s stock price using expected future earnings per share and
dividend, and we came up $178.55 for the intrinsic value. This
gives us some sense of the price tends to fall in the future as the
data is less than the current price today.
Relative Valuation Model
We used a relative model to compare the peer competitors within
the asset management industry based on the average project P/E
ratio. The average P/E ratio for 2017 that we came up was 15.07,
which is lower than the P/E ratio that AMG projected. The implied
value that we got from the model for 2017 was $121.63. However,
we decided to not take this price as consideration since AMG is a
special company that have special structure, it is complicated to
compared with other competitors.
Sensitivity Analysis CV growth of ROIC and WACC
We tested the terminal growth of ROIC vs WACC to test how
sensitive the stock price is to changes in our forecast. Incremental
changes in ROIC have little influence on price. Changes in WACC
do have a large impact on price. Any increase in WACC will
significantly reduce the stock price.
CV growth rate and WACC
We tested the terminal growth rate vs WACC to test how sensitive
the stock price is to changes in our forecast. We found that
incremental changes in either will have a significant impact on
price. The stock price changes inversely to each other but CV
growth rate has the great impact on price.
Important Disclaimer
This report was created by students enrolled in the Security
Analysis (6F:112) class at the University of Iowa. The report was
originally created to offer an internal investment recommendation
for the University of Iowa Krause Fund and its advisory board. The
report also provides potential employers and other interested
parties an example of the students’ skills, knowledge and abilities.
Members of the Krause Fund are not registered investment
advisors, brokers or officially licensed financial professionals. The
investment advice contained in this report does not represent an
offer or solicitation to buy or sell any of the securities mentioned.
Unless 10 otherwise noted, facts and figures included in this
report are from publicly available sources. This report is not a
complete compilation of data, and its accuracy is not
guaranteed. From time to time, the University of Iowa, its
faculty, staff, students, or the Krause Fund may hold a
financial interest in the companies mentioned in this report.
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http://www.nasdaq.com/symbol/amg/competitors?sortname=marke
tcapitalizationinmillions&sorttype=1
17. Affiliated Managers Group, Inc. (AMG). Yahoo Finance.
Retrieved September 12, 2017 from
https://finance.yahoo.com/quote/AMG?p=AMG
18. BlackRock, Inc. (BLK).Yahoo Finance. Retrieved September
12, 2017, from
https://finance.yahoo.com/quote/BLK?p=BLK
19. Ameriprise Financial, Inc. (AMP). Yahoo Finance Retrieved
September 12, 2017
https://finance.yahoo.com/quote/AMP?p=AMP
20. State Street Corporation (STT). Yahoo Finance. Retrieved
September 12, 2017
https://finance.yahoo.com/quote/STT?p=STT
21. Diamond Hill Investment Group, Inc. (DHIL). Yahoo Finance.
Retrieved September 12, 2017
https://finance.yahoo.com/quote/DHIL?p=DHIL
22. Sheen. M. (May 25, 2017). Deloitte: Four catalysts changing
the asset management landscape in 2017. Investment Week.
Retrieved September 12, 2017, from
https://www.investmentweek.co.uk/investment-
week/news/3010788/deloitte-four-catalysts-changing-the-asset-
management-landscape-in-2017#
23. Amg 10-k (2016) Retrieved data 9/17/17 from
https://www.sec.gov/Archives/edgar/data/1004434/000100443417
000004/amg_10-kx12312016.htm
24. AMG Website Retrieved 9/17/17 from
https://www.amg.com/about-amg.html#strategy
25. Industry Surveys Capital Markets.
CFRAEquityResearch_CapitalMarkets_Mar_23_2017.pdf.
Retrieved from https://www-capitaliq-
com.proxy.lib.uiowa.edu/CIQDotNet/Research/InvestmentRe
search.aspx?CompanyId=24445&pagemode=7. Retrieved
data 9/17/17
26. http://www.investopedia.com/terms/n/noncashcharge.asp
27. Affiliated Managers Group, Inc. (2016). 2016 Annual
Report. Retrieved from
http://ir.amg.com/phoenix.zhtml?c=98878&p=irol-
reportsAnnua
28. Affiliated Managers Group: Investment Manager
Highlight (AMG).By J. William Carpenter. April 9,
2016.http://www.investopedia.com/articles/investing/040916/
affiliated-managers-group-investment-manager-highlight-
amg.aspl
29. Investor Relations. Retrived from
http://ir.amg.com/phoenix.zhtml?c=98878&p=irol-IRHome
30. Retrieved from Bloomberg
31. Sifma. “DOL’s Fiduciary Rule Proposal”
https://www.sifma.org/resources/submissions/sifma-submits-
comments-to-the-dol-on-its-fiduciary-rule-proposal-asset-
management-group/
Affiliated Managers Group
Key Assumptions of Valuation Model
Ticker Symbol AMG
Current Share Price $182.86
Current Model Date 11/14/2017
FY End (month/day) Dec. 31
Pre-Tax Cost of Debt 3.74%
Beta 1.783
Risk-Free Rate 2.88%
Equity Risk Premium 2.41%
Market Risk Premium 4.81%
CV Growth of NOPLAT
CV Growth of EPS
Current Dividend Yield
Marginal Tax Rate 35.00%
Effective Tax Rate 24.20%
Operating revenues by measure
Revenue 8.56%
Mutual Fund 11.57%
Institutional 5.83% High Net Worth 7.09%
Affiliated Managers Group
Revenue Decomposition
Fiscal Years Ending Dec. 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021E
Assets Under Managment
Total 623.0 633.3 688.7 828.9 885.1 927.4 971.8 1018.3
Mutual Fund 188.4 175.8 188.3 226.6 242.0 253.6 265.7 278.4
Institutional 355.6 347.5 401.2 482.9 515.6 540.3 566.1 593.2
High Net Worth 76.2 88.0 99.2 119.4 127.5 133.6 140.0 146.7
Sales
Total 2.5 2.5 2.2 2.3 3.3 3.4 3.6 3.8
Mutual Fund 1.2 1.2 1.0 1.1 1.6 1.6 1.7 1.8
Institutional 1.0 1.0 0.9 0.9 1.3 1.4 1.4 1.5
High Net Worth 0.2 0.3 0.3 0.3 0.4 0.4 0.5 0.5
Expense ratio
Total 0.40% 0.39% 0.32% 0.27% 0.37% 0.37% 0.37% 0.37%
Mutual Fund 0.66% 0.70% 0.55% 0.47% 0.64% 0.64% 0.64% 0.64%
Institutional 0.29% 0.28% 0.22% 0.19% 0.25% 0.25% 0.25% 0.25%
High Net Worth 0.32% 0.30% 0.28% 0.24% 0.33% 0.33% 0.33% 0.33%
Asset Class
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Equities 62.7% 52.4% 49.9% 49.9% 49.9% 49.9% 49.9% 49.9%
Alternative 27.5% 30.9% 36.6% 36.6% 36.6% 36.6% 36.6% 36.6%
Fixed Income/Multi-class & other 9.4% 13.2% 13.4% 13.4% 13.4% 13.4% 13.4% 13.4%
Asset Class
Total 623.0 633.3 688.7 828.9 885.1 927.4 971.8 1018.3
Equities 390.4 332.0 344.0 414.0 442.1 463.2 485.4 508.6
Alternative 171.2 195.5 252.4 303.8 324.4 339.9 356.2 373.2
Fixed Income/Multi-class & other 58.6 83.8 92.3 111.1 118.6 124.3 130.2 136.5
Operating revenues by geography (in millions)
Revenue 2510.9 2484.5 2194.6 2267.9 3286.6 3443.8 3608.6 3781.2
United States 2510.9 1657.2 1477.5 1526.8 2212.7 2318.5 2429.5 2545.7
United Kingdom 645.3 566.4 585.3 848.2 888.8 931.3 975.9
Other 182.0 150.7 155.7 225.7 236.5 247.8 259.7
Operating revenues by measure (in millions)
Revenue 2510.9 2484.5 2194.6 2267.9 3286.6 3443.8 3608.6 3781.2
Mutual Fund 1242.6 1238.2 1036.0 1070.6 1551.5 1625.7 1703.5 1785.0
Institutional 1022.8 979.4 878.5 907.8 1315.6 1378.6 1444.5 1513.6
High Net Worth 245.5 266.9 280.1 289.5 419.5 439.5 460.6 482.6
Present Value of Operating Lease Obligations (2016) Present Value of Operating Lease Obligations (2015) Present Value of Operating Lease Obligations (2014) Present Value of Operating Lease Obligations (2013) Present Value of Operating Lease Obligations (2012)
Operating Operating Operating Operating Operating
Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending Leases Fiscal Years Ending Leases Fiscal Years Ending Leases Fiscal Years Ending Leases
2017 37.7 2016 36 2015 33.8 2014 30.1 2013 298
2018 34.7 2017 33.7 2016 28.8 2015 29.2 2014 246
2019 31.7 2018 31 2017 25.2 2016 23.5 2015 225
2020 30 2019 29.5 2018 22.8 2017 21.4 2016 29
2021 27.4 2020 28.4 2019 21.6 2018 19.8 2017 56
Thereafter 57.4 Thereafter 82.1 Thereafter 69.4 Thereafter 69.5 Thereafter 142
Total Minimum Payments 218.9 Total Minimum Payments 240.7 Total Minimum Payments 201.6 Total Minimum Payments 193.5 Total Minimum Payments 996
Less: Interest 28 Less: Interest 34 Less: Interest 29 Less: Interest 28 Less: Interest 96
PV of Minimum Payments 190.8 PV of Minimum Payments 207 PV of Minimum Payments 173 PV of Minimum Payments 165 PV of Minimum Payments 900
Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases
Pre-Tax Cost of Debt 3.74% Pre-Tax Cost of Debt 3.74% Pre-Tax Cost of Debt 3.74% Pre-Tax Cost of Debt 3.74% Pre-Tax Cost of Debt 3.74%
Number Years Implied by Year 6 Payment 2.1 Number Years Implied by Year 6 Payment 2.9 Number Years Implied by Year 6 Payment 3.2 Number Years Implied by Year 6 Payment 3.5 Number Years Implied by Year 6 Payment 2.5
Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease
Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment
1 37.7 36.3 1 36 34.7 1 33.8 32.6 1 30.1 29.0 1 298 287.3
2 34.7 32.2 2 33.7 31.3 2 28.8 26.8 2 29.2 27.1 2 246 228.6
3 31.7 28.4 3 31 27.8 3 25.2 22.6 3 23.5 21.0 3 225 201.5
4 30 25.9 4 29.5 25.5 4 22.8 19.7 4 21.4 18.5 4 29 25.0
5 27.4 22.8 5 28.4 23.6 5 21.6 18.0 5 19.8 16.5 5 56 46.6
6 & beyond 27.4 45.1 6 & beyond 28.4 63.6 6 & beyond 21.6 53.5 6 & beyond 19.8 53.3 6 & beyond 56 110.8
PV of Minimum Payments 190.8 PV of Minimum Payments 206.5 PV of Minimum Payments 173.1 PV of Minimum Payments 165.4 PV of Minimum Payments 899.8
Affiliated Managers Group
Income Statement
Fiscal Years Ending Dec. 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021E
Revenue 2,510.90 2,484.50 2,194.60 2,267.87 3,286.61 3,443.84 3,608.59 3,781.22
Compensation and related expenses -1,030.50 -1,027.70 -932.40 -980.45 -1,420.88 -1,488.85 -1,560.08 -1,634.71
Selling, general and administrative -485.50 -443.80 -398.10 -416.61 -603.75 -632.63 -662.90 -694.61
Intangible amortization and impairments -122.20 -115.40 -110.20 -99.99 -144.90 -151.84 -159.10 -166.71
Depreciation and other amortization -16.90 -18.80 -19.50 -21.21 -22.27 -23.39 -24.55 -25.78
Other operating expenses -40.60 -43.80 -29.10 -45.11 -65.37 -68.50 -71.78 -75.21
Operating income 815.20 835.00 705.30 704.50 1,029.43 1,078.63 1,130.18 1,184.19
Income / loss from equity method investments 281.70 288.90 328.80 318.54 340.15 356.42 373.47 391.34
Interest expense / income -76.60 -88.90 -89.40 -67.62 -55.34 -56.85 -57.17 -57.51
Imputed interest expense and contingent payment arrangements -30.10 40.30 -3.90 -- -- -- -- --
Investment and other income / expense 23.30 15.30 33.80 28.05 40.65 42.60 44.64 46.77
Income / loss before income taxes 1,013.50 1,090.60 974.60 983.47 1,354.89 1,420.80 1,491.12 1,564.80
Income taxes -246.10 -263.40 -235.60 -238.00 -327.88 -343.83 -360.85 -378.68
Net income / loss 767.40 827.20 739.00 745.47 1,027.01 1,076.96 1,130.27 1,186.12
Net income non-controlling interests -333.50 -317.70 -266.20 -296.24 -429.32 -449.86 -471.38 -493.93
Net income / loss controlling interest 433.90 509.50 472.80 449.23 597.69 627.11 658.89 692.19
Weighted average shares
Basic 55.00 54.30 54.20 55.79 56.37 56.83 56.89 56.95
Per share
Basic 7.89 9.37 8.73 8.05 10.60 11.03 11.58 12.16
Dividend per share 0.00 0.00 0.00 0.80 1.00 1.20 1.20 1.20
Affiliated Managers Group
Value Driver Estimation
Fiscal Years Ending Dec. 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021E (CV)
NOPLAT Computation:
EBITA:
Revenues 2,510.90 2,484.50 2,194.60 2267.9 3286.6 3443.8 3608.6 3781.2
- Compensation and related expenses -1,030.50 -1,027.70 -932.40 -980.5 -1420.9 -1488.9 -1560.1 -1634.7
- Selling, general and administrative -485.50 -443.80 -398.10 -416.6 -603.7 -632.6 -662.9 -694.6
- Intangible amortization and impairments -122.20 -115.40 -110.20 -100.0 -144.9 -151.8 -159.1 -166.7
- Depreciation and other amortization -16.90 -18.80 -19.50 -21.2 -22.3 -23.4 -24.6 -25.8
- Other operating expenses -40.60 -43.80 -29.10 -45.1 -65.4 -68.5 -71.8 -75.2
+ interest on PV operating leases 28.53 34.16 28.07 28.1 28.1 28.1 28.1 28.1
EBITA 843.73 869.16 733.37 732.57 1,057.50 1,106.70 1,158.25 1,212.26
Less: Adjusted Taxes:
Income Tax Provision 246.10 263.40 235.60 238.00 327.88 343.83 360.85 378.68
Plus: Tax Shield on Interest Expense 26.81 31.12 31.29 23.67 19.37 19.90 20.01 20.13
Plus: Tax Shield on Implied Lease Interest 9.99 11.96 9.83 9.83 9.83 9.83 9.83 9.83
Plus: Tax on any non-operating losses 70.56 84.25 66.79
Plus: Tax on Intangible Amortization & Impairments 42.77 40.39 38.57 35.00 50.72 53.14 55.69 58.35
Adjusted Taxes 396.23 431.11 382.08 306.49 407.80 426.70 446.37 466.98
Plus: Change in Deferred Tax (DT) Liabilites
Deferred Tax Liabilities -491.70 -565.70 -660.80 -533.7 -600.5 -612.2 -624.4 -637.4
Net Deferred Tax Liabilities -491.70 -565.70 -660.80 -533.67 -600.54 -612.18 -624.41 -637.37
Change in Net Deferred Tax Liabilities -34.80 -74.00 -95.10 127.13 -66.88 -11.63 -12.23 -12.96
NOPLAT 412.71 364.06 256.20 553.22 582.83 668.37 699.65 732.32
Invested Capital
Operating Currrent Asset (CA)
Normal Cash 50.22 49.69 43.89 45.36 65.73 68.88 72.17 75.62
Plus: Account Receivable 425.90 391.20 383.30 280.3 406.2 425.6 446.0 467.3
Plus: Prepaid expenses and other current assets 172.60 199.90 122.40 125.20 128.07 131.00 134.00 137.06
Operating Current Asset (CA) 648.72 640.79 549.59 450.85 600.00 625.50 652.16 680.02
Operating Current Liabilities (CL)
Payables and accrued liabilities 808.30 729.40 729.30 627.8 909.9 953.4 999.0 1046.8
Non Interest-Bearing Current Liabilities (CL) 808.30 729.40 729.30 627.8 909.9 953.4 999.0 1046.8
Net Operating Working Capital
Plus:PPE Fixed assets 95.40 114.10 110 116 121 127 134 141
Plus:Acquired Clent relationships, net 1,778 1,686 1,497 1,497 1,497 1,497 1,497 1,497
Plus: PV of Operating Leases 201.6 240.7 218.9 221.1 225.5 230.0 234.6 239.3
Plus: Net Other Operating Assets (net of depreciation or amortization) 72 59 61 61.2 61.2 61.2 61.2 61.2
Less: Other Operating Liabilities 215 213 149 163.3 163.3 167.3 171.7 177.1
Invested Capital 1773.02 1798.49 1558.49 1554.96 1432.29 1420.85 1408.48 1394.61
ROIC
ROIC=NOPLAT/Beginning Invested Capital 23.84% 20.53% 14.25% 35.50% 37.48% 46.66% 49.24% 51.99%
FCF
FCF= (NOPLAT)-(Change in Invested Capital) 370.78 338.58 496.20 556.74 705.50 679.80 712.02 746.19
EP
EP=NOPLAT-(Beginning Invested Capital*WACC) 243.14 190.38 80.02 400.55 430.51 528.06 560.47 594.35
Affiliated Managers Group
Key Management Ratios
Fiscal Years Ending Dec. 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021E
Liquidity Ratios
Current Ratio (Current Assets/Current Liabilities) 1.42 1.58 1.28 1.13 1.91 2.57 3.15 3.72
Cash Ratio (Cash & Cash Equivalents/Current Liabilities) 0.68 0.77 0.59 0.49 1.32 1.98 2.57 3.14
Activity or Asset-Management Ratios
Asset Turnover Ratio (Total Revenues / Total Assets) 0.33 0.32 0.25 0.27 0.34 0.33 0.33 0.32
Receivables Turnover (Total Revenues / Total Accounts Receivables) 5.90 6.35 5.73 8.09 8.09 8.09 8.09 8.09
Fixed Asset Turnover (Total Revenues / Total PP&E) 26.32 21.77 19.93 19.62 27.08 27.02 26.96 26.91
Financial Leverage Ratios
Debt Ratio (Total Debt / Total Assets) 24.62% 24.19% 24.11% 20.86% 19.04% 17.80% 16.73% 15.74%
Equity Ratio (Total Equity / Total Assets) 55.71% 56.40% 58.29% 63.63% 63.47% 65.35% 66.95% 68.08%
Debt/Equity Ratio (Total Debt / Total Equity) 44.18% 42.89% 41.36% 32.79% 30.00% 27.23% 24.99% 23.12%
Profitability Ratios
ROA (Net Income / Total Assets) 9.97% 10.65% 8.45% 5.26% 6.25% 6.10% 5.99% 5.89%
ROE (Net Income / Total Equity) 17.89% 18.88% 14.49% 8.27% 9.84% 9.33% 8.95% 8.66%
Profit Margin (Net Income / Total Revenues) 30.56% 33.29% 33.67% 19.81% 18.19% 18.21% 18.26% 18.31%
Payout Policy Ratios
Payout Ratio (Dividends per Share / EPS) -- -- -- 0.10 0.09 0.11 0.10 0.10
Total Payout Ratio ((Dividends Paid + Repurchases) / Net Income)
Affiliated Managers Group
Cash Flow Statement
Fiscal Years Ending Dec. 31 2014 2015 2016
Cash flow from operating activities 1,436.9 1,208.4 1,027.6
Net income / loss 767.4 827.2 739.0
Adjustments to reconcile net income / loss to net cash flow from operating activities669.5 381.2 288.6
Intangible amortization and impairments 122.2 115.4 110.2
Depreciation and other amortization 16.9 18.8 19.5
Deferred income tax provision / benefit 81.0 101.2 59.3
Imputed interest expense and contingent payment arrangements 30.1 -40.3 3.9
Income / loss from equity method investments, net of amortization -281.7 -288.9 -328.8
Distributions received from equity method investments 366.9 346.1 346.4
Other non-cash items 11.4 2.3 -20.0
Amortization of issuance costs 7.6 8.1 4.8
Other non-cash items excluding amortization of issuance costs 3.8 -5.8 -24.8
Tax benefit from exercise of stock options -- -- --
Other adjustments -- -- --
Share-based compensation and Affiliate equity expense 113.7 102.7 80.4
Share-based compensation -- -- --
Affiliate equity expense -- -- --
Changes in assets and liabilities 209.0 23.9 17.7
Increase / decrease in investment advisory fees receivable -- -- --
Increase / decrease in prepaids and other current assets -- -- --
Increase / decrease in Affiliate investments in partnerships -- -- --
Increase / decrease in prepaids and other current assets excluding increase / decrease in Affiliate investments in partnerships-- -- --
Increase / decrease in other assets, net -8.4 2.1 -92.3
Purchases of trading securities by Affiliate sponsored consolidated products-1.9 -4.6 -86.2
Increase / decrease in other assets -6.5 6.7 -6.1
Decrease / increase in payables, accrued liabilities and other liabilities 190.9 -34.3 51.8
Sales of trading securities by Affiliate sponsored consolidated products 1.3 4.1 82.8
Increase / decrease in accounts payable, accrued liabilities and other long-term liabilities189.6 -38.4 -31.0
Increase / decrease in receivables 26.5 56.1 58.2
Increase / decrease in unsettled fund shares receivable -- -- --
Increase / decrease in unsettled fund shares payable -- -- --
Increase / decrease in minority interest -- -- --
Cash flow from / used in investing activities -1,268.1 -324.5 -1,332.2
Investments in Affiliates -1,245.0 -297.7 -1,361.3
Purchase of fixed assets -19.2 -38.2 -20.2
Purchase of investment securities -21.2 -13.5 -16.0
Sale of investment securities 17.3 24.9 65.3
Increase in other assets -- -- --
Cash flow from / used in financing activities -77.6 -857.7 200.9
Borrowings of senior debt 1,746.5 1,253.3 1,350.0
Borrowings of senior bank debt excluding issuance of senior notes -- -- --
Issuance of senior notes -- -- --
Repayments of senior debt and convertible securities -1,020.6 -1,256.0 -1,125.0
Repayments of senior bank debt -- -- --
Repurchase of senior convertible securities -- -- --
Issuance of junior convertible trust preferred securities -- -- --
Repayment of debt assumed in new investment -- -- --
Issuance of convertible securities -- -- --
Repurchase of junior convertible trust preferred securities -- -- --
Repayments of senior debt -- -- --
Repurchase of senior debt -- -- --
Issuance of common stock 41.4 57.8 465.8
Dividends paid on common stock
Repurchase of common stock -190.8 -413.7 -33.4
Cost of call spread option agreements -- -- --
Settlement of derivative contracts -- -- --
Note and contingent payments 14.4 20.5 4.9
Redemptions of minority interest-Affiliate investments in partnerships -- -- --
Distributions to non-controlling interests -569.4 -431.4 -354.1
Distributions to non-controlling interests excluding subscriptions / redemptions of non-controlling interests in partnerships-- -- --
Subscriptions / redemptions of non-controlling interests in partnerships -- -- --
Affiliate equity issuances and repurchases -65.7 -120.6 -104.0
Other financing items, net -33.4 32.4 -3.3
Issuance costs -- -- --
Excess tax benefit / expense from share-based compensation 61.5 44.5 0.0
Settlement of treasury lock -- -- --
Settlement of forward equity sale agreement -45.0 0.1 0.0
Other financing items -49.9 -12.2 -3.3
Effect of foreign exchange rate changes on cash and cash equivalents -10.2 -13.0 -27.2
Net decrease in cash and cash equivalents before cash assumed upon consolidation of affiliate sponsored investment products81.0 13.2 -130.9
Cash assumed upon consolidation of Affiliate sponsored investment products 0.0 0.0 -2.1
Net decrease / increase in cash and cash equivalents 81.0 13.2 -133.0
Cash and cash equivalents at beginning of period 469.6 550.6 563.8
Cash and cash equivalents at end of period 550.6 563.8 430.8
Affiliated Managers Group
Cash Flow Statement
Fiscal Years Ending Dec. 31 2017E 2018E 2019E 2020E 2021E
Net Income 449.23 597.69 627.11 658.89 692.19
Add:Depreciation and Amortization 21.21 22.27 23.39 24.55 25.78
Changes in working capital accounts:
Increase in receivables 103 -126 -19 -20 -21
increase in payables and accrued liabilities -101 282 44 46 48
increase (decrease) in deferred income taxes -127 67 12 12 13
Increase(decrease)in other liabilities 14 0 4 4 5
Net cash flows from operating activiites 359 843 690 725 763
(increase)decrease in other investments 9 0 0 0 0
(increase)decrease in other assets 0 0 0 0 0
(increase)decrease in other client relationships 0 0 0 0 0
Capital Expenditures 6 6 6 6 7
Investments in affiliates 0 0 0 0 0
Net cash flows from investing activities 15 6 6 7 7
Increase in marketable securities -3 -3 -3 -3 -3
Proceeds from issuance of notes payable & long-term debt -328 40 9 9 9
Payment of dividends -44.63 -56.37 -68.20 -68.27 -68.33
change in non-controlling interests 24 25 26 26 27
Issuance of common stock 54 54 43 0 0
Repurchase of common stock -200 -15 -15 -15 -15
Net cash flows from financing activities -497 45 -8 -51 -50
Net change in cash flows -124 894 688 681 720
cash, beginning of year 431 307 1,201 1,889 2,570
cash, end of year 307 1,201 1,889 2,570 3,290
Affiliated Managers Group
Common Size Income Statement
Fiscal Years Ending Dec. 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021E
Revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Compensation and related expenses 41.04% 41.36% 42.49% 43.23% 43.23% 43.23% 43.23% 43.23%
Selling, general and administrative 19.34% 17.86% 18.14% 18.37% 18.37% 18.37% 18.37% 18.37%
Intangible amortization and impairments 4.87% 4.64% 5.02% 4.41% 4.41% 4.41% 4.41% 4.41%
Depreciation and other amortization 0.67% 0.76% 0.89% 0.94% 0.68% 0.68% 0.68% 0.68%
Other operating expenses 1.62% 1.76% 1.33% 1.99% 1.99% 1.99% 1.99% 1.99%
Operating income 32.47% 33.61% 32.14% 31.06% 31.32% 31.32% 31.32% 31.32%
Income / loss from equity method investments 11.22% 11.63% 14.98% 14.05% 10.35% 10.35% 10.35% 10.35%
Interest expense / income -3.05% -3.58% -4.07% -2.98% -1.68% -1.65% -1.58% -1.52%
Imputed interest expense and contingent payment arrangements-1.20% 1.62% -0.18% 0.00% 0.00% 0.00% 0.00% 0.00%
Investment and other income / expense 0.93% 0.62% 1.54% 1.24% 1.24% 1.24% 1.24% 1.24%
Income / loss before income taxes 40.36% 43.90% 44.41% 43.37% 41.22% 41.26% 41.32% 41.38%
Income taxes -9.80% -10.60% -10.74% 10.49% 9.98% 9.98% 10.00% 10.01%
Net income / loss 30.56% 33.29% 33.67% 32.87% 31.25% 31.27% 31.32% 31.37%
Net income non-controlling interests -13.28% -12.79% -12.13% -13.06% 13.06% 13.06% 13.06% 13.06%
Net income / loss controlling interest 17.28% 20.51% 21.54% 19.81% 18.19% 18.21% 18.26% 18.31%
Weighted average shares
Basic -3.05% -3.58% -4.07% -2.46% -1.72% -1.65% -1.58% -1.51%
Per share
Basic -1.20% 1.62% -0.18% -0.36% 0.32% 0.32% 0.32% 0.32%
Dividend per share 0.00% 0.00% 0.00% 0.04% 0.03% 0.03% 0.03% 0.03%
Affiliated Managers Group
Weighted Average Cost of Capital (WACC) Estimation
Risk free rate 2.88%
Expected market premium 4.81%
Beta 1.78
Cost of Equity 11.46%
Debt Rating A3
Spread 0.0086
Pre-Tax Cost of debt 3.74%
Tax Rate 35.00%
After-Tax Cost of Debt 2.43%
MV Weight of Equity 10,202 81.60%
MV Weight of Debt 2,300 18.40%
WACC 9.80%
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Affiliated Managers Group
Common Size Balance Sheet
Fiscal Years Ending Dec. 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021E
Cash and cash equivalents 7.15% 7.26% 4.92% 3.59% 12.55% 18.37% 23.37% 28.01%
Receivables 5.53% 5.04% 4.38% 3.28% 4.25% 4.14% 4.06% 3.98%
Investments in marketable securities 2.24% 2.57% 1.40% 1.47% 1.34% 1.27% 1.22% 1.17%
Total current assets 14.93% 14.86% 10.70% 8.34% 18.14% 23.78% 28.65% 33.15%
Other investments 2.17% 1.92% 1.69% 1.83% 1.64% 1.52% 1.43% 1.34%
Fixed assets, net 1.24% 1.47% 1.26% 1.35% 1.27% 1.24% 1.22% 1.20%
Goodwill 34.46% 34.34% 30.04% 30.78% 27.47% 25.55% 23.90% 22.37%
Acquired client relationships, net 23.10% 21.71% 17.11% 17.53% 15.65% 14.56% 13.62% 12.75%
Equity method investments in Affiliates 23.17% 24.93% 38.50% 39.44% 35.20% 32.75% 30.63% 28.67%
Other assets 0.93% 0.76% 0.70% 0.72% 0.64% 0.60% 0.56% 0.52%
Total assets 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Payables and accrued liabilities 10.50% 9.39% 8.34% 7.35% 9.51% 9.27% 9.09% 8.94%
Total current liabilities 10.50% 9.39% 8.34% 7.35% 9.51% 9.27% 9.09% 8.94%
Senior bank debt 11.11% 8.28% 9.93% 7.71% 7.10% 6.65% 6.26% 5.92%
Senior notes 9.57% 12.06% 10.74% 9.61% 8.79% 8.22% 7.72% 7.29%
Convertible securities 3.94% 3.85% 3.45% 3.53% 3.15% 2.93% 2.74% 2.58%
Long-term debt 24.62% 24.19% 24.11% 20.86% 19.04% 17.80% 16.73% 15.79%
Deferred income taxes 6.39% 7.28% 7.55% 6.25% 6.28% 5.95% 5.68% 5.44%
Other liabilities 2.79% 2.75% 1.71% 1.91% 1.71% 1.63% 1.56% 1.51%
Total liabilities 44.29% 43.60% 41.71% 36.37% 36.53% 34.65% 33.05% 31.69%
Redeemable non-controlling interests 8.39% 7.88% 7.70% 7.89% 7.04% 6.55% 6.13% 5.75%
Paid in Capital 8.74% 8.95% 12.28% 13.21% 12.36% 11.92% 11.15% 10.47%
Accumulated other comprehensive income / loss0.41% -0.23% -1.40% -1.44% -1.28% -1.19% -1.12% -1.05%
Retained earnings 28.10% 33.23% 34.91% 41.09% 42.69% 45.50% 48.27% 50.66%
Treasury stock, at cost -3.13% -5.43% -4.41% -6.86% -6.28% -5.99% -5.74% -5.52%
Total stockholders equity 42.51% 44.40% 49.07% 53.89% 54.52% 56.78% 58.69% 60.32%
Non-controlling interests 13.20% 12.00% 9.22% 9.73% 8.95% 8.57% 8.26% 7.99%
Total equity 55.71% 56.40% 58.29% 63.63% 63.47% 65.35% 66.95% 68.31%
Total liabilities and equity 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Affiliated Managers Group
Balance Sheet
Fiscal Years Ending Dec. 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021E
Cash and cash equivalents 551 564 431 307 1,201 1,889 2,570 3,290
Receivables 426 391 383 280 406 426 446 467
Investments in marketable securities 173 200 122 125 128 131 134 137
Total current assets 1,149 1,155 937 712 1,735 2,446 3,150 3,894
Other investments 167 149 148 157 157 157 157 157
Fixed assets, net 95.40 114.10 110 116 121 127 134 141
Goodwill 2,653 2,668 2,628 2,628 2,628 2,628 2,628 2,628
Acquired client relationships, net 1,778 1,686 1,497 1,497 1,497 1,497 1,497 1,497
Equity method investments in Affiliates 1,784 1,937 3,368 3,368 3,368 3,368 3,368 3,368
Other assets 72 59 61 61 61 61 61 61
Total assets 7,698 7,769 8,749 8,540 9,568 10,285 10,996 11,747
Payables and accrued liabilities 808 729 729 628 910 953 999 1,047
Total current liabilities 808 729 729 628 910 953 999 1,047
Senior bank debt 855 643 869 659 679 684 688 693
Senior notes 737 937 939 821 841 845 849 854
Convertible securities 303 299 302 302 302 302 302 302
Long-term debt 1,895 1,879 2,110 1,781 1,822 1,830 1,839 1,849
Deferred income taxes 492 566 661 534 601 612 624 637
Other liabilities 215 213 149 163 163 167 172 177
Total liabilities 3,409 3,388 3,649 3,106 3,496 3,563 3,634 3,710
Redeemable non-controlling interests 646 613 674 674 674 674 674 674
Paid in Capital 673 696 1,074 1,128 1,183 1,226 1,226 1,226
Accumulated other comprehensive income / loss 32 -18 -123 -123 -123 -123 -123 -123
Retained earnings 2,163 2,582 3,054 3,509 4,085 4,679 5,308 5,931
Treasury stock, at cost -241 -422 -386 -586 -601 -616 -631 -646
Total stockholders equity 3,273 3,450 4,293 4,602 5,217 5,840 6,453 7,062
Non-controlling interests 1,016 932 807 831 856 882 908 935
Total equity 4,289 4,382 5,100 5,433 6,073 6,722 7,361 7,997
Total liabilities and equity 7,698 7,769 8,749 8,540 9,568 10,285 10,996 11,707
Affiliated Managers Group
Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models
Key Inputs:
CV Growth 5.00%
CV ROIC 51.99%
WACC 9.80%
Cost of Equity 11.46%
Fiscal Years Ending Dec. 31 2016 2017E 2018E 2019E 2020E 2021E (CV)
NOPLAT 553.22 582.83 668.37 699.65 732.32
Invested Capital 1558.49 1554.96 1432.29 1420.85 1408.48 1394.61
CapEx (Δ IC) -3.53 -122.67 -11.44 -12.37 -13.87
ROIC 0.60 0.47 0.40 0.40 0.39
Free Cash Flow 556.74 705.50 679.80 712.02 746.19
CV
DCF Model: T=1 T=2 T=3 T=4 T=5 (CV)
NOPLAT 553.22 582.83 668.37 699.65 732.32
Free Cash Flow (FCF) to Discount 556.74 705.50 679.80 712.02 746.19
Continuing Value (CV) 13802.02 Discount CV by 4 years.
Discount Period 1.00 2.00 3.00 4.00 4.00
Disocount Factor 0.91 0.83 0.76 0.69 0.69
PV of FCF Discounted by WACC 507.07 585.23 513.60 489.95 9497.34
Value of Operating Assets 11593.20
+ marketable securities 122.40
- Debt 2109.60
- ESOP 127.19
-Operating Leases 190.83
Value of Equity 9,287.98
Shares Outstanding 56.95
Intrinsic Value (per share) $163.10
Economic Profit Model: T=1 T=2 T=3 T=4 T=5 (CV)
Economic Profit to Discount 401 431 528 560 594
Continuing Value (CV) 12,394 Discount CV by 4 years.
Discount Period 1 2 3 4 4
Disocount Factor 0.91 0.83 0.76 0.69 0.69
PV of FCF Discounted by WACC 365 357 399 386 8,528
PV (Economic Profit) 10,034.71
+ Beginning Invested Capital (T=0) 1,558.49
Value of Operating Assets 11,593.20
+ marketable securities 122.40
- Debt 2,109.60
- ESOP 127.19
-Operating Leases 190.83
Value of Equity 9,287.98
Shares Outstanding 56.95
Intrinsic Value (per share) $163.10
Sensitivity Table WACC
$163.10 9.20% 9.40% 9.60% 9.80% 10.00% 10.20% 10.40%
51.39% 191.20 180.84 171.38 162.71 154.73 147.37 140.54
51.59% 191.28 180.92 171.46 162.78 154.80 147.43 140.60
51.79% 191.36 181.00 171.53 162.85 154.87 147.49 140.66
ROIC 51.99% 191.44 181.07 171.60 162.92 154.93 147.56 140.72
52.19% 191.52 181.15 171.67 162.99 155.00 147.62 140.78
52.39% 191.60 181.22 171.74 163.06 155.06 147.68 140.84
52.59% 191.68 181.30 171.81 163.12 155.12 147.74 140.90
WACC
$163.10 9.20% 9.40% 9.60% 9.80% 10.00% 10.20% 10.40%
2.00% 117.60 113.31 109.24 105.39 101.73 98.24 94.92
3.00% 134.27 128.84 123.73 118.93 114.39 110.11 106.06
4.00% 157.36 150.12 143.39 137.13 131.29 125.82 120.69
CV growth rate 5.00% 191.44 181.07 171.60 162.92 154.93 147.56 140.73
6.00% 246.83 230.24 215.49 202.29 190.40 179.65 169.87
7.00% 352.56 320.37 293.12 269.77 249.52 231.80 216.16
8.00% 634.51 539.26 467.81 412.23 367.76 331.37 301.03
Affiliated Managers Group
Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
Fiscal Years Ending Dec. 31 2017E 2018E 2019E 2020E 2021E
EPS 10.93 11.32 11.53 11.85 12.18
Key Assumptions
CV growth 5%
CV ROE 8.18%
Cost of Equity 11.30%
Future Cash Flows
P/E Multiple (CV Year) 16.93
EPS (CV Year) 12.18
Future Stock Price 206.22
Dividends Per Share 0.80$ 1.00$ 1.20$ 1.20$ 1.20$
Discounted Year 1 2 3 4 4.00
Discounted Cash Flows 0.72 0.81 0.87 0.78 135
1.11 1.23 1.38 1.54 173.28
Intrinsic Value 178.55
For Discounting:
Number of Periods 1 2 3 4 5
Model Date 10/30/2017
Next FYE 12/31/2017
Last FYE 12/31/2016
Days in FY 365
Days to FYE 303
Elapsed Fraction 0.830
Affiliated Managers Group
Relative Valuation Models
EPS EPS
Ticker Company Price 2017E 2018E P/E 17 P/E 18
BLK BlackRock Inc $469.79 $22.50 $26.92 20.88 17.45
BEN Franklin Resources, Inc $40.71 $3.00 $3.22 13.57 12.64
BK Bank of New York Mellon Corb $51.89 $3.57 $3.97 14.54 13.07
BX The Blackstone Group $31.10 $2.75 $3.02 11.31 10.30
Average 15.07 13.37
AMG Affiliated Managers Group $182.86 $8.05 $10.60 22.7 17.2
Implied Relative Value:
P/E (EPS17) $ 121.36
P/E (EPS18) 141.72$
Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding
Number of Options Outstanding (shares): 1.40
Average Time to Maturity (years): 2.80
Expected Annual Number of Options Exercised: 0.50
Current Average Strike Price: 108.53$
Cost of Equity: 11.46%
Current Stock Price: $182.86
2017E 2018E 2019E 2020E 2021E
Increase in Shares Outstanding: 0.50 0.50 0.40
Average Strike Price: 108.53$ 108.53$ 108.53$
Increase in Common Stock Account: 54.3 54.3 43.4 - -
Change in Treasury Stock -200 -15 -15 -15 -15
Expected Price of Repurchased Shares: 182.86$ 203.81$ 227.16$ 253.18$ 282.19$
Number of Shares Repurchased: (1.1) (0.1) (0.1) (0.1) (0.1)
Shares Outstanding (beginning of the year) 54.20 55.79 56.37 56.83 56.89
Plus: Shares Issued Through ESOP 0.50 0.50 0.40 0.00 0.00
Less: Shares Repurchased in Treasury -1.09 -0.07 -0.07 -0.06 -0.05
Shares Outstanding (end of the year) 55.79 56.37 56.83 56.89 56.95
VALUATION OF OPTIONS GRANTED IN ESOP
Ticker Symbol AMG
Current Stock Price $182.86
Risk Free Rate 2.88%
Current Dividend Yield 0.00%
Annualized St. Dev. of Stock Returns 38.80%
Average Average B-S Value
Range of Number Exercise Remaining Option of Options
Outstanding Options of Shares Price Life (yrs) Price Granted
Range 1 1.4 108.53 2.80 90.85$ 127$
Range 2 -$
Range 3 -$
Range 4 -$
Range 5 -$
Range 6 -$
Range 7 -$
Range 8 -$
Range 9 -$
Range 10 -$
Range 11 -$
Range 12 -$
Range 13 -$
Range 14 -$
Total 1 108.53$ 2.80 90.85$ 127$