Even though KKR’s fourth quarter ENI was a disappointment, it was tempered by an on-target distribution and deals still in the pipeline
KKR is down 4% in trading today after reporting a major earnings miss in 4Q14, economic net income (ENI) of $0.05 compared to an expected $0.43. You might expect the market to punish KKR even more for such a big disappointment, but the company announced $0.35 distribution, in line with expectations, and investors seem to believe that it will manage to maintain that level in the future.
“KKR reported a sizable ENI miss driven primarily by larger than anticipated balance sheet marks on Energy and CLO holdings, as well as slightly lower than modeled appreciation from the private equity portfolio. Importantly, the 4Q14 distribution was inline with Street expectations and KKR remains well positioned for near-term distributions with previously announced deals,” write Sterne Agee analysts Jason Weyeneth and Samuel Ross.
They give KKR, which is trading at $23.98, a Buy rating and a $32 price target.
Stenre Agee called KKR their best idea two months ago
In December, Weyeneth and Ross called KKR their ‘best idea,’ arguing that it had nearly 55% total return upside (it was at $22.48 at the time) and that “the market is currently placing little value on their ability to generate performance fees despite a stellar long-term investment track record.”
Weyeneth and Ross had forecast ENI of $0.35, below market consensus, but part of the reason that turned out to be too high was because net performance fees came in $0.17 lower than they expected. Despite the setback the analysts haven’t changed their longer term projections for KKR.
KKR marked down energy, CLOs more aggressively than anticipated
The other reason KKR took a big hit was because of unrealized losses from its energy and collateralized loan obligation (CLO) holdings. The loss from its energy holdings was expected, but it was still larger than anticipated because KKR wrote them down by 38% (down to 75% of cost), instead of the 15% markdown that had been expected. CLOs were marked down 4.5% (to 93% of cost) compared to Weyeneth and Ross’s expected 3% markdown. Finally, KKR’s private equity portfolio appreciated by 2.7% when the Sterne Agee analysts had expected it to grow by 4.5%.
Both in the previous December report and again today the analysts explained that KKR has already announced enough deals that near term distributions should be secure.