Gabelli Asset Mgmt GBL
March 09, 2001 - 6:09pm EST by
2001 2002
Price: 29.25 EPS 1
Shares Out. (in M): 100 P/E
Market Cap (in $M): 0 P/FCF
Net Debt (in $M): 100 EBIT 0 0

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Just because an idea has doubled doesn't mean it isn't worth investigating again. GBL, a stock I mentioned a year ago, retains as many positive traits as it did then though the valuation is clearly not in line to appreciate 100% this year barring a takeover. But it is undervalued in my opinion.

-The business:

GBL manages 23.5 billion, with over 90% of that in equities and about 50% respectively each in mutual funds and institutional accounts.

-The positives.

1) The balance sheet is grossly overcapitalized. Cash and investments alone equal 260m. Shareholder's equity stands at an impressive 202m, with none of it goodwill.

2) Extremely high free cash flow. Net income was 58m and equity grew by 55m last year, and it went in to the best place - cash and investments. As far as I can tell, the company has no tangible CapEx requirements. You won't see any grandiose 'corporate campus's' like TROW likes to spend its money on.

3) A cheap valuation. Despite a double over the past 12 months, GBL trades for 15x earnings or a cap of 878m. This alone is lower than its peer groups. JNC, BEN, BLK, EV, FII, NEU, and TROW trade at about 17.5x, 18.5x, 29.6x, 19.2x, 21.0x, and 24.5x, and 17.6x respectively. However, GBL's equity - which again, is all 'real' - is 23% of the current market cap. No one else comes close. The only cheaper fund company in the group is SV, which is currently experiencing a rapid AUM decrease and likely sharply lower earnings.

4) A cheap valuation. Pioneer was acquired last year with roughly GBL's asset mix (equities, but not as much) at over 1 billion despite having a curious collage of bizarre 'assets'. GBL currently trades for 3.7x their AUM, but again - this doesn't consider the balance sheet. Subtract out the equity, and the percentage drops to 2.9x.

5) A solid longer term record. Gabelli's fund have enjoyed an upsurge in performance, with most of the core funds beating the S & P 500 over the past 3 and 5 years. Most of their funds also do well compared to their peer groups, and M* ranking of 4 and 5 stars are common.

6) Name managers. Of course, Mario Gabelli recvs the headlines, but Howard Ward (whose Gabelli Growth is doing far better in the growth area than most of his peers) and Barbara Marcin have also made names for themselves.

7) Easy monitored performance. This provides a rough idea as to the current state of AUM.

The negatives.

1) AUM is slowing.

004Q 23.6 (almost flat with Q1 last year)
003Q 23.8 (8.7% higher than Q4 last year)
002Q 23.3 (25.3 higher than Q3 last year)
001Q 23.0 (22.3% higher than Q2 last year)
994Q 21.9 (28.8% higher than Q1 last year)
993Q 18.6 (9.4% higher than Q4 last year)
992Q 18.8
991Q: 17.0

This is not unexpected considering the performance of the S&P500 in the past 12 months. However, with fund performance so far this year and positive net flows through 2000 I would suggest that GBL is at least within 23b in AUM at this point. My guess is they are above 24b. Compared with other asset managers, esp. compared directly to the equity components of its peer group, this performance has been strong.

2) Management has no clear plan to use their balance sheet. While they have purchased shares, the float here is limited. Eventually the accumulation of cash and investments might become embarrassing to GBL, esp. with Mr. Gabelli's clear focus on shareholder value at other firms. At the very least, however, you might expect management to use its cash wisely.

3) Periodic investment gains tend to obscure the operating performance. This is not issue fundamentally, but you have to be careful to separate the sources of income.

4) Mario Gabelli's employment agreement and mortality. Mr. Gabelli has an unusual compensation agreement with GBL (I'll let you read all the gory details in the 10K). I have decided to simply consider this as a labor expense and go from there. However, as the primary manager of much of GBL's asset base, his loss would be felt immediately. On the other hand, his compensation is so extreme - both from GBL and from fund management - that you would hope GBL could attract a high profile value manager in short order.

5) Fund performance could suffer. While some suggest that tech declines might force individual investors into managed assets, GBL's funds could still do poorly relative to their peer groups. Also, if the stock market decline is sustained, then so will lackluster EPS comparisons. That said, at least the cash flow will continue to pile up.

Asset managers are my absolute favorite industry group. I don't think it is hard to understand why - they are easy to follow, they generate buckets of cash, and over time they perform far better than virtually anything in the entire market. Even in a world of 5% S & P 500 returns, GBL will remain a cash machine.


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