Can Aberdeen Asset Management's (LSE: ADN) growth continue and are the shares cheap?
Capital appreciation is surely the goal of many investors. One method of achieving that is to buy companies with steady earnings growth. If bought when the shares are cheap, two drivers could move the share price up:
- growth in earnings, and
- an upwards P/E re-rating.
Highly successful fund manager Peter Lynch classified steady growers as Stalwarts, which he typically traded for 20% to 50% share-price gains. But whether buying for gains like that or holding for the longer term, we need to know if reliable earnings growth can continue, and whether the shares are cheap.
Seeking durable growth
Not all companies achieve stable growth as you can see by the aggregate performance of those in London's premier FTSE 100 index (UKX), where the compound annual earnings-growth rate has been just 0.7% over the last five years:
|Year to June||2007||2008||2009||2010||2011||2012|
|FTSE 100 index||6608||5626||4249||4917||5946||5571|
|Aggregate earnings per share||537||503||427||397||527||557|
Consistent, cash flow-backed growth in profits is a promising characteristic in today's markets so, for this series, I'm examining firms with annual earnings growth between 4% and 20%.
One contender is Aberdeen Asset Management (LSE: ADN), which is an international investment management company, managing assets for both institutions and private individuals. This table summarises the company's recent financial record:
|Year to September||2008||2009||2010||2011||2012|
|Adjusted earnings per share||9.45p||6.52p||14.09p||20.13p||24.45p|
So, earnings have grown at an equivalent 26.8% compound annual growth rate putting Aberdeen just above the Stalwart category.
Aberdeen is a pure asset management company, employing around 1,900 people in 23 countries. Despite persistent uncertainty in financial markets, the firm continues to power ahead. The release of its full-year results on 26 November revealed another good set of figures with revenue up 11% and underlying earnings per share up 21%. This enabled a 28% hike in the total dividend, and follows a long-rising share price and promotion to London's premier FTSE 100 index in March - 29 years after the company's establishment.
Last year, the Aberdeen earned about 94% of its revenues from management fees, 5% from performance fees and 1% from transaction fees. The company earned those incomes from some £187 billion of assets under management. Of that figure, roughly 54% was in equities, 19% in fixed income, 13% in alternative investment strategies, 10% in property and 4% in the money markets.
The firm is pushing for growth in markets with what it calls 'the largest asset pools', particularly the Americas and Europe. For example, in early October, it opened a new office in New York to support expansion in North America. Based on past performance, growth in revenues seems likely to filter down to further earnings growth, too.
Aberdeen's earnings growth and value score
I analyse five indicators to determine whether earnings growth can continue and if the shares offer good value:
1. Growth: revenue, earnings and cash flow have all been growing steadily. 5/5
2. Level of debt: net cash on the balance sheet. 5/5
3. Outlook and current trading: good recent trading and a cautiously positive outlook. 4/5
4. Enterprise value to free cash flow: a trailing 11, and below historic growth rates. 5/5
5. Price to earnings: trailing at about 14 and below historic growth rates. 5/5
Overall, I score Aberdeen Asset Management 24 out of 25, which encourages me to believe this stalwart can continue earnings growth that out-paces that of the wider FTSE 100, and that the shares offer good value when compared to the FTSE's price to earnings ratio of around 11 and the firm's growth predictions.
With steady historical growth, net cash on the balance sheet, modest valuation based on historical growth rates, good recent trading and a positive outlook, Aberdeen is a star scorer. However, forward growth could be modest compared to past performance.
Right now, forecast earning growth is 3% for 2013, and the forward P/E ratio is 13.8 with the shares at 349p. Considering that and the other factors analysed in this article, I think that looks like a fair valuation. Forward growth looks less perky and the shares have had a good run. Aberdeen can stay on my watch list, for now.
Aberdeen Asset Management is one of several steady-earnings-growing stalwarts on the London stock exchange, each with the potential to deliver significant capital appreciation when purchased at sensible prices.
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> Kevin does not own any shares mentioned in this article.