Shares of Affiliated Managers Underperform the Market. What Do the Numbers Tell Us?

Shares of Affiliated Managers (AMG) slid -3.5 % during today's afternoon session, which brings their 52 week performance to 21.2%. The Market Inference outlook on this stock is that it is undervalued at today's price of $170.8. But we also believe that a value analysis should be complemented by an overview of the company's growth indicators and market sentiment indicators.

Affiliated Managers Group, Inc., through its affiliates, operates as an investment management company providing investment management services to mutual funds, institutional clients, retails and high net worth individuals in the United States. The mid-cap Financial Services company has 4,050 full time employees and is based in West Palm Beach, United States.

AMG's P/E Ratio Is Better Than the Sector Average

Compared to the Financial Services sector's average of 13.34, Affiliated Managers has a trailing twelve month price to earnings (P/E) ratio of 13.2 and an expected P/E ratio of 9.0. P/E ratios are calculated by dividing the company's share price by its trailing 12 month or forward earnings per share, which stand at $12.93 and $19.02 respectively.

Earnings represent the net profits left over after subtracting costs of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since Affiliated Managers's P/E ratio is lower than its sector average, we can deduce that the market is undervaluing the company's earnings.

Affiliated Managers Is Fairly Valued in Terms of Expected Growth

Another factor pointing to Affiliated Managers's value is its PEG ratio of 0.93. This is the stock's price to earnings ratio divided by its estimated earnings growth rate. If the resulting ratio is near or lower than 1 — but higher than 0 — its indicates that the company is faitly valued in terms of expected growth.

AMG Has an Alarming P/B Ratio

The price to book (P/B) ratio of a company is a comparison of the company's market capitalization versus its net asset, or book value. A ratio lower than 1 tells you that the equity market is undervaluing the book value of the company's assets, and ratios higher than 1 tell you that the equity markets are overvaluing the company in terms of its assets.

Of course, a company is worth much more than its assets alone, so the focus on P/B ratio is mainly to enable investors to single out undervalued securities that offer a margin of safety. Since Affiliated Managers's P/B ratio of 2.3 is higher than its sector average of 1.95, such a margin of safety does not exist for the stock.

Investors Stand to Gain from AMG's Cash Flows

Affiliated Managers has strong cash flows. With a coefficient of variability of 16.3% and an average growth rate of 16.9%, the company is effectively turning its revenue into cash. We calculate Affiliated Managers's free cash flows by subtracting capital expenditures (long term investments in the business) from its total cash flows from operations. The table below shows us that capital expenditures are evolving at a -6.3% rate, versus 16.7% for operating expenses:

Date Reported Cash Flow from Operations ($ MM) Capital expenditures ($ MM) Free Cash Flow ($ MM) YoY Growth (%)
2021-12-31 1,259 -8 1,251 24.98
2020-12-31 1,009 -8 1,001 8.84
2019-12-31 929 -10 920 n/a

Understanding Affiliated Managers's Margins

If you buy a stock for the long run, you want the underlying business model to be profitable. Since Affiliated Managers's has minimal cost of revenue, we will focus our analysis on operating margins, which are calculated on the basis of its operating expenses.

Date Reported Total Revenue ($ MM) Operating Expenses ($ MM) Operating Margins (%) YoY Growth (%)
2021-12-31 2,412 399 40.04 33.07
2020-12-31 2,028 534 30.09 -3.31
2019-12-31 2,240 600 31.12 n/a

Affiliated Managers's operating expenses are evolving at an average rate of -18.1% compared to 4.8% for its revenues. As a result, the company's average operating margin is 33.8% with an average growth rate of 14.9% and a variability of 16.2%.

We See Mixed Market Signals Regarding AMG

Affiliated Managers has an average rating of buy and target prices ranging from $196 to $155. At its current price of $170.8, the company is trading -4.01% away from its target price of $177.93. 5.2% of the company's shares are linked to short positions, and 96.4% of the shares are owned by institutional investors.

Holder Shares Date Reported Percentage Value
Edgepoint Investment Group Inc. 4,238,169 2022-09-29 11% $723,879,278
Vanguard Group, Inc. (The) 3,791,126 2022-09-29 10% $647,524,332
Blackrock Inc. 3,411,411 2022-09-29 9% $582,669,009
Atlanta Capital Management Company LLC 2,440,141 2022-09-29 6% $416,776,090
Clarkston Capital Partners LLC 2,077,383 2022-09-29 6% $354,817,022
Southeastern Asset Management Inc/TN/ 1,618,112 2022-09-29 4% $276,373,534
FMR, LLC 1,565,145 2022-09-29 4% $267,326,770
State Street Corporation 1,271,393 2022-09-29 3% $217,153,928
Kiltearn Partners, LLP 1,213,836 2022-09-29 3% $207,323,192
Ariel Investments, LLC 1,145,254 2022-09-29 3% $195,609,386
The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.