IGM Financial Earnings: Continued Equity and Credit Market Headwinds Will Offset More Recent Results
While there was little in narrow-moat IGM Financial’s IGM third-quarter results that would alter our long-term view of the firm, we are reducing our CAD 42 per share fair value estimate to CAD 38 in response to weaker near-term AUM, revenue, and profitability than we had been projecting, as well as our expectation that the firm will continue to face equity and credit market headwinds over the next several quarters. We view the shares as being modestly undervalued relative to our revised fair value estimate.
IGM closed out the September quarter with CAD 218.8 billion in assets under management, or AUM, down 3.3% sequentially but up 4.8% year over year. Consolidated net outflows of CAD 1.1 billion during the quarter were reflective of a negative 1.9% annualized rate of organic AUM growth, within our forecasted range of negative 3% to negative 1% for average annual organic AUM growth during 2023-27, but still a step in the wrong direction as outflows have expanded over the past couple of quarters. We now expect fourth-quarter outflows to be on par with what we saw during the third quarter.
While average total AUM was up 3.6% year over year, net asset management fee income improved 4.9% during the third quarter when compared with the prior year’s period. Total revenue increased 3.0% year over year during the third quarter. IGM’s year-to-date top-line increase of 9.3% hints that the firm will close out 2023 with full-year revenue growth in a mid- to high-single digit range even as the firm now faces a more difficult fourth quarter, below our current expectations.
As for profitability, pretax operating margins (exclusive of discontinued operations) continued to decline, falling another 210 basis points to 35.3% during the third quarter, with year-to-date margins down 50 basis points year over year to 35.8%. As we noted above, we expect the fourth quarter to be tougher, with both revenue and profitability ending up lower year over year than the current trend would imply.
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