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AllianceBernstein: Lowering Fair Value Estimate by 3% on Weaker Performance and Flows in September

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We’ve lowered our fair value estimate for no-moat AllianceBernstein AB to $34 per share from $35 to account for revised near-term expectations about assets under management, revenue, and profitability since our last update. While we view the shares as being modestly undervalued, we see better options in the traditional asset management space—like wide-moat BlackRock—for long-term investors.

AB closed out September 2023 with $669 billion in AUM, down 3.3% sequentially but up 9.2% year over year and 3.5% since the start of the year. Estimated net long-term outflows of $3.8 billion during the first nine months of 2023 were a letdown when compared with the $1.8 billion that flowed out during the same period in 2022, when AB was facing heftier equity and credit headwinds. That said, AB benefited from the funding of a large institutional mandate during last year’s first quarter, without which the firm would have had net outflows of $11.5 billion during the first nine months of 2022.

We continue to believe that AB will produce average annual organic AUM growth within a negative 3% to positive 2% range during 2023-27. Although average AUM looked to be up 5% year over year during the third quarter, we still expect the firm to struggle to generate positive top-line growth this year, with our expectations for full-year revenue growth in a negative 4%-6% range. Our five-year forecast, which includes another equity market correction near the end of our projection period, has revenue expanding at a positive 0.3% compound annual growth rate during 2023-27.

As for profitability, AB’s adjusted GAAP operating margins (which excludes transaction, integration, restructuring, and other costs) during the first half of 2023 were just 100 basis points lower year over year, as the firm seems to have far less operating leverage in its business model than its traditional asset-management peers. We expect AB to generate adjusted GAAP operating margins in an 18%-23% range during 2023-27.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Greggory Warren

Strategist
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Greggory Warren, CFA, is a strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers the traditional U.S.-and Canadian-based asset managers, as well as Berkshire Hathaway.

Before assuming his current role in 2017, Warren covered the financial-services sector as a senior analyst since late 2008. Prior to that time, he covered non-alcoholic beverage manufacturers and distributors, packaged food firms, food service distributors, and tobacco companies. Before joining Morningstar in 2005, Warren worked as a buy-side equity analyst for more than seven years, covering consumer staples and consumer cyclicals.

Warren holds a bachelor's degree in accounting and English from Augustana College. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Society of Chicago. During 2014-19, Warren was selected to participate on the analyst panel at Berkshire Hathaway’s annual meeting, asking questions directly of Warren Buffett and Charlie Munger. The analyst panel was disbanded ahead of Berkshire’s 2020 annual meeting. Warren also ranked second in the investment services industry in The Wall Street Journal’s annual “Best on the Street” analysts survey in 2013, the last year the survey was conducted.

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