Asset Management company Ares Management is taking Wall Street by surprise today, falling to $170.84 and marking a -5.7% change compared to the S&P 500, which moved -0.0%. ARES is -11.8% below its average analyst target price of $193.69, which implies there is more upside for the stock.
As such, the average analyst rates it at buy. Over the last year, Ares Management has underperfomed the S&P 500 by -1.7%, moving 14.6%.
Ares Management Corporation operates as an alternative asset manager in the United States, Europe, and Asia. The company is included in the financial services sector, which includes a wide variety of industries such as credit services, mortgage, banking, and insurance. Owing to this variety and the fast pace of innovation within these industries, investors may struggle to make sense of this sector.
As evidenced by the financial meltdown of 2008, seemingly healthy financial services companies — from insurers to investment banks — may see their market value plunge to zero in a matter of months. While the financial crash was likely a once-in-a-generation event, it highlights the volatility that is inherent to the sector. Financial innovation creates opportunities, but also new types of risk that investors and even the companies themselves may not fully understand.
Ares Management's trailing 12 month P/E ratio is 97.1, based on its trailing EPS of $1.76. The company has a forward P/E ratio of 26.6 according to its forward EPS of $5.6 -- which is an estimate of what its earnings will look like in the next quarter. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the third quarter of 2024, the finance sector has an average P/E ratio of 15.92, and the average for the S&P 500 is 29.3.
To deepen our understanding of the company's finances, we should study the effect of its depreciation and capital expenditures on the company's bottom line. We can see the effect of these additional factors in Ares Management's free cash flow, which was $2.79 Billion as of its most recent annual report. The balance of cash flows represents the capital that is available for re-investment in the business, or for payouts to equity investors as dividends. The company's average cash flow over the last 4 years has been $-549623333.3 and they've been growing at an average rate of 26.3%. ARES's weak free cash flow trend shows that it might not be able to sustain its dividend payments, which over the last 12 months has yielded 2.3% to investors. Cutting the dividend can compound a company's problems by causing investors to sell their shares, which further pushes down its stock price.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Ares management's P/B ratio is 12.92 -- in other words, the market value of the company exceeds its book value by a factor of more than 12, so the company's assets may be overvalued compared to the average P/B ratio of the Finance sector, which stands at 1.78 as of the third quarter of 2024.
Since it has a higher P/E ratio than its sector average, a higher than Average P/B Ratio, and negative cash flows with an upwards trend, Ares Management is likely overvalued at today's prices. The company has mixed growth prospects because of an inflated PEG ratio and strong operating margins with a positive growth rate. We hope you enjoyed this overview of ARES's fundamentals. Be sure to check the numbers for yourself, especially focusing on their trends over the last few years.
