Janus Capital Group, Inc. (NYSE: JNS)
Executive Summary
Janus Capital Group, Inc. ("Janus", "JNS" or the "Company") is a leading asset manager. The Company has a market cap of $1.60B and an enterprise value of $1.43B. As of TTM 6/30/13, the Company generated revenues and free cash flow of $855.6MM/$188.4MM, respectively.
Janus common shares have recently lagged and have forgone the attention of many investors. The drivers stemmed from (1) sluggish flagship mutual fund performance amplified by the use of performance fees, which negatively impacted earnings; (2) choppy AUM as Janus' AUM troughed at $123.0B in FY2008, peaked at $169.0B in FY2010 and currently stands at $160.6B; (3) net fund outflows of $5.4B for Q2/13 (within the Janus platform) continue the trend of outflows since 2010 and (4) instability within its PM base and senior management. However, the above negative factors overshadow a business which generates high returns on tangible capital (in excess of 100%), a management team which has focused on correcting the above issues, along with Janus' undemanding valuation (8.8x LTM FCF) and steady operating metrics (27% op. margins, consistent $200.0MM FCF generation) demonstrate the sustainability of the business, which has the scale and distribution to survive and thrive. The following attributes make the Company a highly attractive investment at current prices:
Diversified Business Model: Janus has diversified its business model across various strategies. The Company was historically a growth equity specialist; however, management has expanded the product offerings by acquiring a value equity shop, a successful institutional investor focused mathematical/quant shop and has organically expanded into fixed income offerings. On the distribution front, Janus' products historically targeted retail investors; however, the firm has started to focus on targeting institutional and international investors.Consistent Free Cash Flow Generator: Ja! nus has consistently generated over $200.0MM in free cash flow over the past five years. Further, EBITDA to Operating Cash Flow conversion is extremely high, consistently in excess of 94%. The consistent free cash flow generation over a cycle and high EBITDA/Operating Cash Flow conversion showcases an asset-lite, cash generative business.Intelligent Capital Allocation: Management has been intelligent in repurchasing/re-pricing/extending debt with excess cash flow and returning cash to shareholders through dividends. Going forward, given the low reinvestment requirements of the business, we expect an increase in cash returned to shareholders as its 2014 obligations have been primarily extended.Dai-ichi Transaction is a Net Positive: The 2012 investment (discussed below in greater detail) is a net positive for Janus as it allows for the Company to gain a larger presence overseas with a recognized brand name in Japan. Additionally, Janus gains sticky AUM from the deal along with the possibility of a take-private transaction. Attractive Valuation Which is Priced Below Private Market Comparables and a Low Multiple of Free Cash Flow: Janus' common shares currently trade below their conservatively estimated private market value of $13.30 per share (representing ~50% upside at current prices) and a ~15% average FCF/EV yield. Investors are overlooking the Company's well-financed liquid balance sheet and AUM base. We estimate that the common stock is conservatively worth between $11.30 and $13.30 per share. Strong Financial Position: As of Q213, Janus has a net cash position of $210MM and $250.0MM revolver capacity, even as the Company has reduced its debt load by over 30% since 2010. Janus' balance sheet strength allows for optionality in acquiring complementary businesses, returning cash to shareholders or paying down debt. Further, on a net debt basis, Janus is unlevered (no net debt), which could potentially allow for a large balance sheet recapitalization or sale to a financial buyer. Scalable Fee Based Busi! ness Mode! l which Has the Potential to Generate High Returns on Invested Capital: Janus' businesses are highly scalable as they require little incremental capital to grow beyond optional investments in technology and distribution. Further, the Company generates high returns on tangible invested capital, in excess of 100% (EBIT/NWC+Fixed Assets). Multiple Value Creating Opportunities: The Company has multiple options available to create shareholder value, such as (1) rebound in fund performance; (2) increased distribution to international and institutional investors; (3) increased return of capital. Headline Risk is Masking Attractive Strategies: Headline risk of outflows, primarily from Janus' flagship equity products has caused investors to overlook its successful Intech strategies (over 85% have beat their 1 year respective categories) and its fixed income platform, which has grown at a fast rate, amounting to ~17% of AUM. Additionally, 100% of the fixed income funds are in the top 3 year Lipper categories.Company Overview
Introduction
Janus is a leading asset manager offering individual investors and institutional clients various asset management disciplines through the firm's global distribution network. As of June 30, 2013, Janus Capital Group's subsidiaries managed $160.6B. The Company's strategies include growth, core, international, value, mathematical, alternative and fixed-income. These products are sold through advisors and financial intermediaries, to institutional investors and directly to retail investors.
Janus Capital Group was created as a result of the 2003 merger of Janus Capital Corporation into its parent company, Stilwell Financial Inc. Janus Capital Group consists of Janus Capital Management LLC, INTECH Investment Management LLC (Intech), and Perkins Investment Management LLC (Perkins).
Assets Under Management Breakdown | Assets Under Management By Distribution Channel |
Janus Capital Management ($102.6B 6/30/13 AUM)
Founded in 1969, Janus Capital Management is a growth equities investment manager. Janus takes a long-term view and uses a bottom up, company by company investment approach to gain a differentiated view in the marketplace. In addition to growth, core and international equity funds, Janus manages balanced, alternative, fixed-income and money market funds.
Given the Company's historic focus on equity strategies, the Company has focused on building a solid fixed income platform within the Janus brand. Since the rollout, Janus has benefited from the significant inflows to fixed income mutual funds as their strong performance (100% in the top 3/5 year Lipper categories) has lifted fixed income AUM from 7.0% of AUM at the beginning of FY2010 to ~17% as of 6/30/2013.
The Janus franchise was popular in the 1990's growth investing heydays, and was affected by the tech bubble and the 2003 mutual fund scandal. Even with the past events, Janus has continued to maintain a sizable AUM base and garner interest from private investors such as Dai-ichi, who believe in the distribution capabilities and survivability of the business.
Perkins Capital Management ($16.7B 6/30/13 AUM)
Founded in 1980, Perkins Capital Management is a value investment manager, which focuses on building diversified portfolios of what it believes to be high quality, undervalued stocks with favorable risk/reward characteristics. It employs a fundamental analysis and a quantitative analysis with a bottom-up stock picking approach to create its equity portfolios. The firm has historically balanced outperformance in down markets with participation in up markets. Perkins manages small-, mid- and large-cap value institutional separate accounts as wel! l as mutu! al funds..
Investment Philosophy
Perkins seeks to outperform its benchmark and peers over a full market cycle by building diversified portfolios of what it believes to be high quality, undervalued stocks with favorable reward to risk characteristics. Perkins believes that rigorous downside analysis conducted prior to determination of upside potential allows it to mitigate losses during difficult markets and perform well in up markets.
Intech Investment Management ($41.3B 6/30/13 AUM )
Intech manages institutional portfolios using an investment process based on a mathematical theorem that seeks to add value for clients by capitalizing on the volatility in stock price movements. The firm primarily provides its services to pension and profit sharing plans. It also manages accounts for banking or thrift institutions, investment companies, pooled investment vehicles, charitable organizations, corporations, and state or municipal government entities. It also manages equity mutual funds for its clients. The firm was founded in 1987 and is based in West Palm Beach, Florida.
The acquisition of Intech has been value creating for Janus, given its differentiated mathematical strategies and historic focus on stickier institutional investors, who differ from Janus' traditional retail client base.
Differentiation
Intech has an industry leading position in enhanced equity/mathematical strategies. The following has led to Intech being a popular choice among institutional investors:
Mathematical BasisSound Theory & Disciplined Implementation Emphasis on Risk ManagementStable Investment TeamQuantitative Research Intensive toUnique Investment FocusHot Bank Companies For 2014
Mutual Fund Performance and Performance Fees
Overall performance has lagged recently for Janus, with has led to its flagship funds facing net outflows. This has stemmed from a difficult environment for predomin! antly acti! vely managed equity funds. This has affected Janus' funds as only roughly ~46% of the funds are within the top two Morningstar quintiles. Underperformance has also impacted distribution and caused negative performance fees to squeeze margins.
Negative performance fees have had a ~$22.2MM negative impact to earnings for Q2/13. Offsetting the negative performance fees was the fact that the moving average window of three-year performance improved for the last quarter. Going forward, it will be important to watch three-year relative performance as it is the metric that is used to calculate mutual fund performance fees.
Capital Allocation
On the capital allocation front, management has aggressively extended or repurchased debt in order to solidify the Company's balance sheet. Just as recent as June 2013, Janus initiated a convertible debt exchange offer, in which the Company exchanged $110.0MM of 3.25% convertible debt due in 2014, for $117.0MM of 0.75% convertible debt due in 2018. The notes will be convertible into JNS shares at $12.60 per share. Janus will benefit from a reduction in its annual interest expense ($3.5MM in FY2013), a five year extension of $110.0MM of debt, and the freeing up of cash to opportunistically repay outstanding debt or return cash to shareholders.
Janus has also returned cash to shareholders, repurchasing a net $11.4MM shares in FY2012, $6.7MM for the first half of FY2013 and currently pays roughly ~$54.0MM per annum in dividends, which translates into a 3.2% yield at current prices. With only ~$95.0MM in near-term maturities, the probability of Janus increasing buybacks and dividends is high.
Dai-ichi Transaction
On August 10th, 2012, Dai-ichi (one of the largest life insurers in Japan) entered into an agreement with Janus to purchase a 15%-20% stake of the Company primarily through open market purchases. With the transaction, Janus received $2.0B in assets to manage for Dai-ichi and for Dai-ichi's investment arm to distribute Janus' products! in Japan! . Additionally, Dai-ichi received board representation.
The transaction was a net positive for Janus as it allowed it to gain wider access internationally, and a long-term partner. Janus' agreement with Dai-ichi has begun to deliver distribution benefits. Dai-ichi Life has introduced Janus to its retail and institutional distribution partners in Japan, including Mizuho Financial Group Inc., Japan's second-largest bank. Further, we believe this sets up the Company for an eventual take-private transaction by Dai-ichi.
Executive Management
Janus has been negatively affected by increasing turnover in senior management and within its portfolio management team. The current CEO, Richard Weil, is the 5th CEO since 2002 and joined in 2010, with prior experience at Allianz. Recently as of May 2013, the managers of Janus Twenty, Forty and Triton funds resigned, also known as the "fourth wave" of portfolio management defections. Offsetting the defections was the hiring of Enrique Chang from American Century to serve as Co-CIO, replacing firm veteran Jonathan Coleman, who returned to his sole portfolio management role (to focus on improving fund performance).
Industry
According to IBISWorld, the Asset Management industry (mutual funds, etc., excluding hedge funds) is expected to grow revenues at a 2.9% CAGR over the next five years, totaling $207.7B. Tailwinds from an aging domestic landscape are expected to boost demand for industry services, as aging baby boomers switch from capital accumulation to preservation in retirement. Additionally, institutional investors will also increase industry AUM as they look to diversify across asset classes to generate returns in order to meet their unique obligations.
Heightened financial regulation is also projected increase, leading to higher compliance costs. In response, scale and multiple product offerings will be necessary, favoring the trend of industry consolidation.
Consolidation
Since the past downturn, asset man! agers hav! e consolidated or have gone private. As demonstrated below in the "private market valuation" section, asset managers have consolidated and have been acquired due to their (1) high returns on invested capital; (2) asset-lite scalable business model; and (3) diversified, stable customer base, which enables the acquirer (per se a bank) smooth out earnings in rougher times.
Competitive Landscape
Janus competes against numerous mutual funds and ETFs and alternative offerings, both well established and start ups. Janus has an estimated ~1.1% market share of total United States AUM, which although seems insignificant, is quite sizable as BlackRock (BLK) is ~4% of AUM, according to IBISWorld. The number of competitors tends to be higher as barriers to entry are lower within the space; however, scale, specifically growth in assets under management along with performance are crucial in order to maintain and grow a brand name.
Porter's Five Forces Analysis
Risk | Severity | Mitigant |
Threat of New Entrants | Moderate | The asset management business is highly competitive. In order to succeed, a firm must have a well-defined niche or scale through distribution. Janus has franchises with improving distribution on the FA and institutional investor front. |
Threat of Substitute Products | Moderate | The proliferation of ETFs presents a real threat; however, actively managed funds have a greater share of the market and add the benefit of active day to day involvement versus passive strategies. Hedge funds also offer a sizable threat; however, higher pricing and restrictions tend to make the "sale" easier for mutual funds. |
Bargaining Power of Suppliers | Low | Human capital is the largest expense or "COGS" within the industry. However, investing in talent just like CapE! x, can le! ad to large returns if it is well selected. |
Bargaining Power of Customers | Moderate | Pricing has seen a recent decline within mutual fund industry as investors have pushed back on pricing with the proliferation of low cost ETFs. However, Companies such as Janus have streamlined their cost structure, making it feasible to compete against ETFs, even while offering active strategies. |
Rivalry | High | Janus mitigates this risk through its wide variety of products (i.e. fixed income, growth equities, mathematical/quant strategies), supported by a growing distribution channel. |
Intrinsic Valuation
A comparable transactions approach and a multiple of free cash flow approach was used to determine the intrinsic value for Janus. Using conservative estimates, the Company's intrinsic value is pegged between $11.00 and $13.30 per share, with the downside estimates at $8.25 per share.
Private Market Valuation
Asset Managers
(click to enlarge)
As the asset management M&A market has been active since 2009, buyers are attracted to the low capital requirements, annuity like revenue streams, high returns on capital and scalability obtained from the business. Historically, asset managers and asset management arms have sold for between 1.0% and 3.0% of assets under management, depending on the platform and product (mutual funds, SMAs, bond funds, etc.) mix. For instance, fixed income funds would generally attract lower prices as fees collected are usually lower than equity products.
The 1.0! %-2.0% of AUM rate used for estimating Janus' private market value is conservatively below previous transactions. By using a blended AUM ($140.0B and $160.6B 6/30/13 AUM) to take into account for a potential near-term decline in AUM, multiplied by 1.5%, (which is 130 bps below comparable transactions) plus net cash and securities of $210.5MM, Janus' private market value is estimated at $13.30 per share. At current prices, shares have upside potential of 50%.Free Cash Flow Valuation
Janus has consistently generated over $200.0MM of free cash flow over a cycle, demonstrating the cash generative nature of the business. One method to estimate the Company's intrinsic value is through applying conservative multiples on the Company's TTM free cash flow of $188.4MM. At a 7.0x multiple, Janus' value is estimated at $8.25 per share, representing our downside case and an upside case of 12.0x, which supports our conservative private market valuation.
Additionally, Janus currently employs an underleveraged balance sheet with no net debt, which could be used for a mass share buyback or buy-out as the Company could support at least 2.5x net debt/EBITDA.
Catalysts to Value Realization
Catalyst | Description |
Increasing Return of Capital | Janus trades at a materially discount to its intrinsic value and boosts an underleveraged balance sheet. The Company could potentially cannibalize itself through the use of free cash flow or refinance. |
Favorable Mutual Fund Performance | A rebound in mutual fund performance will lead to higher performance fees and positive reaction from sell-side analysts. This would potentially lead to multiple expansion. |
Attractive Valuation | At current prices, upside is roughly ~50% compared with the Company's conse! rvatively! estimated private market value, and at a low multiple of free cash flow (~8x). |
Take Private by Dai-ichi or another strategic/financial buyer | The asset management M&A market has been fairly active. Further with Dai-ichi's 20% stake, we believe the Company is an attractive takeover candidate for both strategic (i.e. Dai-ichi) and financial buyers. |
Risks & Mitigants
Risk | Impact | Mitigant |
Threat from Larger Asset Managers and Broker Dealers | Decline in revenues and profitability. | Janus has aggressively expanded into additional product offerings, such as fixed income, which have rapidly grown as a percentage of AUM, and have had strong performance. The Company has also invested in its distribution capabilities, focusing on financial advisors, institutional investors and international (i.e. use of Dai-ichi for Japan). Janus successfully navigated the last downturn, staying free cash flow positive throughout the cycle. |
Continued Turnover in Management and Investment Teams. | Decline in GAAP Tangible Net Asset Value | Although turnover has been high, the Company appears to be at an inflection point in terms of the new proposed management set up. AUM is somewhat sticky, further AUM would have to decline below $120B before Janus' credit rating would be in question and intrinsic value impaired. |
Continued Underperformance within the Company's funds. | Decline in AUM and Revenues. | Offset by the Company's diversified strategies (i.e. Intech, Fixed Income, Perkins) The Company has refocused on performance, with Jonathan Coleman returning to lead his respective fund and a new CIO for example. |
Conclusion
In conclusion, Janus is an undervalued business at current prices and offers a compelling long-term upside (50%+), e! ven with ! conservative multiples/assumptions. The Company is well positioned to benefit from positive tailwinds, such as an increase of total U.S. AUM in the next five years, consolidation within the financial services industry, and the potential to utilize its strong financial position. The $13.30 price target assumes AUM of ~$150.0B, which is below 6/30/13 AUM and a 12.0x free cash flow multiple. Further returns could be realized through increased cash flow from operations, improving equity markets, sale of the business at market rate % of AUM and other strategic initiatives (i.e. Dai-ichi partnership).
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in JNS over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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