The Market Has Dropped And I Want To Buy

FTSE 250 mid-cap Ashmore Group plc (LON:ASHM) is exciting our top Fool investing experts.

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Well, my timing was spot on yet again on Friday…

As soon as I mention FTSE 7,000, the inevitable landmark celebrations and even more investors about to pile into shares…

…the market promptly goes into a tailspin and drops by about 300 points in just a few days.

When will I ever learn?

I mean, the index has fallen 2% so far in January…

…and has left all those year-end projections of FTSE 7,200 and beyond looking just that little shakier right now.

Apparently the falls have been something to do with poor Chinese manufacturing data, the weak Argentinian peso and the usual Fed ‘taper’ shenanigans.

Still, market setbacks are a reminder that shares can go down as well as up…

…and are great for us Foolish investors wanting to snap up shares on the cheap!

One share that’s caught my attention — and that of the expert Motley Fool Share Advisor team — is Ashmore (LSE: ASHM).

This mid-cap is exciting our expert investing team

Now this FTSE 250 member is an emerging-market fund manager, so it’s clearly in the market’s line of fire right now.

Nonetheless, Ashmore does have a sound history.

Indeed, I’m particularly impressed how new customers, an acquisition and decent investment performances all combined to propel the group’s client money under management from $38bn to $77bn between 2008 and 2013.

Here’s what else is exciting me and the Share Advisor experts about this FTSE 250 business:

  • An enormous cash pile: Ashmore’s balance sheet carries cash and equivalents of £500m-plus and no debt — so the firm seems very unlikely to go bust even if the markets take a real nosedive!
  • Stratospheric margins: The business has repeatedly converted £1 of sales into 60p-plus of operating profits — indicating a very lucrative and efficient operator.
  • The long-time chief exec is a major shareholder: Founder Mark Coombs has almost £1 billion riding on the share price and looks to be on the side of ordinary investors.
  • A seemingly dependable dividend: Significantly, Ashmore’s payout survived the banking crash intact and has been on the up ever since.
  • Super cash flow: The dividend has been helped by next-to-no capital expenditure. Last year the firm reported an operating profit of £232m by employing just £4m of tangible fixed assets!
  • The valuation has become much more appealing: Recent market falls have left the trailing dividend yield approaching 5%.

Of course, every share has risks and this mid-cap is no exception

In fact, a disappointing update from Ashmore the other week showcased the two main trouble-spots with fund managers:

  1. Clients leaving: The group admitted client money under management had declined by $3bn following a “small number” of redemptions, and;
  2. Clients demanding lower fees: Ashmore warned that a lower fee structure for certain funds would reduce annual revenues by $25m.

While I’m not too worried about the client redemptions — my sector experience tells me customers always come and go — I must admit I’m more concerned about Ashmore’s lower fees.

You see, the fee trend here is not great.

Back in 2009 for instance, the company earned an average management fee of 1.09% on its customers’ portfolios. That figure has since fallen to 0.68%.

The latest warning of lower fees does suggest the declining trend will continue during 2014.

He’s on course to receive a £46 million dividend from his 41% stake!

Valuation-wise, Ashmore hardly looks expensive in my view — given the ratings of many other mid-caps right now.

To cut a long calculation story short, I reckon annual earnings could be running at about 21p per share right now (excluding any performance-related fees the business may receive).

After adjusting the £2.3bn market cap for the surplus cash mountain, I’m left with a P/E of approximately 12 for the underlying business.

Importantly, my earnings forecast covers the trailing 16.1p per share dividend, which should supply a near-5% yield.

I fully expect the payout to be at least maintained during 2014, and I assume chief exec Mark Coombs does, too. You see, he’s on course to receive a £46 million dividend from his 41% stake in the business — and I doubt he’d welcome a ‘rebasing’!

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Neither Maynard or The Motley Fool own any share mentioned.

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