AllianceBernstein Continues to Face Headwinds Created by a Rising Interest-Rate Environment

We’ve lowered our fair value estimate for no-moat AllianceBernstein AB to $38 per share from $40 after updating our valuation model to account for weaker equity and credit market returns in the near term, which will have a negative impact on assets under management, or AUM. We have also moved our Uncertainty Rating for the firm to High from Medium, requiring a wider margin of safety before recommending the shares, which are slightly overvalued right now relative to our revised fair value estimate.

AB closed out February 2023 with $665 billion in AUM, down 10.1% on a year-over-year basis. Exclusive of the $12.2 billion that came in during the third quarter of 2022 as part of the CarVal Investors acquisition, total AUM was down 11.8% over the past year. Net outflows of $3.7 billion during 2022 were reflective of a negative 0.5% rate of organic AUM growth and a step down from the $26.0 billion in positive net flows we saw from the firm during 2021. Even with the headwinds posed by the equity and credit markets right now, and our expectations for another equity market correction in 2025, we currently forecast AB to produce annual organic AUM growth within a range of negative 1% to positive 3% during 2023-27.

With total and average AUM growth expected to expand at a mid-single-digit rate on average annually over the course of our projection period, aided by our expectations for mid-single-digit annualized returns for both equity and fixed-income markets, AB should be able to generate positive top-line growth during 2023-27, even as base management fees continue to be pressured industrywide. As for profitability, with asset-management firms like AB expected to not only pare back their fees but also spend more to produce better investment results and enhance distribution, we expect adjusted GAAP operating margins in an 18% to 21% range during 2022-26.