NEW YORK - With near-record valuations for their stock and higher-than-average earnings growth projected, investors should hold on to stock in money management companies, according to a new report from Putnam, Lovell & Thornton, New York.
The stocks of money managers soared during the third quarter, thanks to the near-record returns in stock and bond markets. Money management company stocks rose 17% during the third quarter of 1995, compared with a 7% rise in the Standard & Poor's 500 Stock Index.
Among the factors pushing stocks higher are stable earnings and a positive long-term sales outlook. But on the down side, sales growth has slowed, relative price-earnings ratios are at an all-time high, acquiring assets through transactions is becoming more costly, and leverage is increasing within the industry, according to Putnam Lovell's research.
Thanks to their recent earnings and asset growth, valuations for publicly traded money managers are trading closer to the market multiples, according to the report. The multiples for money managers' stock have grown from 13.6 times earnings at the start of the year, in the low end of the trading range, to 17.8 times earnings, closer to the market's midpoint, at the end of the third quarter. Historically, money management firms traded at a discount to the market that has ranged from 12% to 18% in bull markets to as much as a 38% discount on market troughs, according to Putnam Lovell's research.
In the long term, money manager stocks should trade at least at the market multiple, because money manager earnings are less volatile than other industries' and the group's long-term earnings rate is expected to top the average growth for the S&P, according to the report. The industry consensus calls for an 11.5% average earnings growth among money managers, compared with 2.9% for the S&P 500, according to the report.