The stock of Fortress Investment Group appears attractively valued, according to an analyst at RBC Capital Markets after the investment management firm reported its financial results for the fourth quarter and full year 2014.
In a note to investors, RBC Capital Markets analyst Bulent Ozcan suggested that the shares of Fortress seemed the least appreciated stock in an undervalued sector. He issued an Outperform rating and $11 price target for the stock.
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Fortress financial performance
Fortress reported GAAP net income of $148 million or $0.24 per diluted share for the fourth quarter and $233 million or $0.43 per share for the full year 2014.
The company said its management fee paying assets under management (AUM) increased 2% to $67.5 billion by the end of the year. Its pre-tax distributable earnings were $123 million for the fourth quarter and $446 million for the full year.
During the fourth quarter, Fortress raised $1.8 billion of capital across alternative investment business. The amount of its total third-party alternative capital raised by the end of 2014 was $6.4 billion.
Fortress achieved $1 billon of net client inflows for Logan Circle during the quarter, bringing to total of $5.4 billion net client inflows in 2014. The company approved a cash dividend of $0.38 per share for the fourth quarter.
Commenting on the performance of Fortress, Ozcan emphasized that the company finished 2014 on a “strong note, reporting its strongest distributable earnings for any year since going public.” He added that despite the doubts regarding its ability to raise capital, Fortress continues to do well as it raised $6.4 billion last year. Ozcan believed that the company could attract additional capita in 2015.
Fortress investors are buying the stock at discount
Ozcan believed that Fortress’ stock is trading at discount based on its current price at around $8 per share. Based on his estimate, the stock is worth $11 per share. According to him, investors in the stock are getting the “optionality on incentive based earnings at little cost.”
He explained, “Assuming fee-based earnings of $0.40 over the next 12 months and applying a 17x PE multiple, we estimate that the shares should be worth at least $6.88. In addition, the company has $3.25 of net cash and investments on its balance sheet. On top, there is about $2.26 of gross undistributed incentive income today, which we believe could grow over time.”
Ozcan enumerated several potential catalysts for the shares of Fortress such as the very strong performance of the hedge fund that could lead to earnings surprises; and the restructuring of Newcastle and Eurocastle that could accelerate income generation.
He also noted that Fortress has very strong credit franchise. He added that Logan Circle Partners has the potential to increase AUM and fee rates as it expands into equities.