Blackstone Group: Business Backdrop Looks Sound
Early in 2016, we all remember, maybe we cringe in remembering how the overall equity market pulled back, with the energy price correction, credit spreads widening dramatically, and so on. The second quarter of 2016 was a relatively boring quarter until Brexit. Then of course, we had the U.S. political stage culminate with the election in November. So, interesting times, always something new and different to react to and understand. But what stands out is how resilient The Blackstone Group (BX: $30.24, up 4% Tuesday) is, and specifically how resilient the business model was in the face of all that.
Looking forward, the company is coming off of all sorts of momentum in the fourth quarter of 2016. Let’s recap.
Management remains constructive around the realization outlook (that is - taking profits on prior investments). Despite another elevated quarter of realizations, which totaled $10 billion (and $40 billion in 2016), management remains constructive on the realization outlook, noting that pipelines are “strong." Thus far in 2017, $8.7 billion of monetizations are currently under contract or have already closed, including the Hilton stake sales, along with Change Healthcare, Optiv, Pactera, and the Japanese residential real estate portfolio, while also a handful of secondaries have already priced so far this year. It all amounts to more money flowing back to the business from investments, which gets passed through to shareholders in the form of dividends.
The company has provided some high-level thoughts on potential implications from the regime change in Washington. While we await the fine print around a number of policy initiatives, at a high level, the company anticipates more of a pro-growth business backdrop, which should have positive implications on Blackstone. (Note that Blackstone's Chairman and CEO Steve Schwarzman is President Trump's Chair of Strategic and Policy Forum). Specifically, an improving economic backdrop will improve the cash flow of the firm’s investments, ultimately the largest driver of fund performance. Management also expects greater capital inflows into the U.S, which has positive implications on future monetization events, while opportunities also exist outside the U.S.
Corporate structure reform is a big deal for Blackstone. The firm isn’t “religious” with any one corporate structure and will make the appropriate changes that are in the best interest of shareholders to maximize value. (As a reminder, Blackstone is currently a publicly traded partnership). If Blackstone were to switch to a traditional corporate structure it is expected to drive a significantly higher valuation as more institutional investors could now buy the stock. We will follow this story closely.
BMR Take: We like what we are seeing out of the fundamental trends for The Blackstone Group and others in the Alternative Asset Manager sector within Financials. This is our favorite sector within Financials and our top pick. The shares trade at a compelling valuation relative to 2017 EPS estimates of $3.20 and 2018 EPS estimates of $3.60.