VIRTUS INVESTMENT PTNRS INC VRTS
May 08, 2009 - 1:46pm EST by
utah1009
2009 2010
Price: 13.25 EPS NA NA
Shares Out. (in M): 6 P/E NA NA
Market Cap (in $M): 76 P/FCF NA NA
Net Debt (in $M): 7 EBIT 0 0
TEV ($): 83 TEV/EBIT NA NA

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Description

 

Virtus Investment Partners is a recent spinoff that was done at a cheap price.  Some simple cost cutting and market improvements could help drive earnings which could triple the stock in 2 years.

 

Company Background

 

I'm guessing that even most VIC members, who are typically more attune to spinoffs than most people, probably missed this one.  Virtus was expelled from The Phoenix Companies (PHX) on 12/31/08 and began trading on the NASDAQ on 1/2/09.  Virtus is a relatively simple, if not boring asset management company.  It's an traditional manager with $22.6 billion in AUM as of 12/31 - 44% equity, 36% fixed income, 20% money market.  2/3rd of the assets are in mutual funds or closed end funds.  The firm's proprietary managers include the Virtus family of closed end and mutual funds, Duff & Phelps Investment Management, SCM Advisors, Kayne Anderson, Zweig Advisors, and one or two others.

 

Virtus has 300 employees (though soon to be less) and a small advisory business that manages $3 billion in separate accounts.  63% of AUM are held in proprietary products while the remainder are subadvised.  They capture more fees with proprietary products, and on average Virtus earns about 40 bps on AUM (this is normal given the asset weights).  They also receive various fees for mutual fund sales such as 12b-1 fees.  This is basically the same business model as Legg Mason for all practical purposes, but without the SIV and debt headaches.

 

Financials

 

Virtus is in great shape.  They have $51 million cash, $6 million securities, a $20 million term loan owed to Phoenix which is due over the next 4 years, and a $45 million convert with a 8% coupon held by Harris Bank (Bank of Montreal).  Harris is more of a partner at this point as they're looking for better US distribution.  The convert is interesting to me.  Harris purchased this pre-spin.  Yes, the coupon is ridiculously high for a convert, but the conversion price is $26.  What is it that Harris sees here that would make them agree to a conversion price that's over 3x the spinoff price?? 

 

Virtus also has $115 million in NOL's for now, so they wont be paying taxes anytime soon.  Plus, they're owed additional NOL's from Phoenix as part of the separation agreement.  The amount of the NOL wont be known until Phoenix files its tax return in September.  It's an odd situation that I cant get much color on.  I think that when you combine the NOL's with Harris' existing interest in Virtus, it shows that there's a decent chance that Harris will eventually buy them.

 

  2007 2008 2009 2010 2011
AUM 40.4 22.6 25.8 29.4 32.0
           
Revenues 226.2 178.2 138.4 161.1 179.9
% of AUM   0.57% 0.57% 0.58% 0.59%
           
Expenses 220.9 760.0 152.4 150.8 157.5
% of AUM   2.41% 0.63% 0.55% 0.51%
           
EBIT 5.3 -581.8 -14.0 10.3 22.5
Margin 2.3% -326.5% -10.1% 6.4% 12.5%
           
Other   52.8 4.7 -0.3 0.0
           
Net Income   -529.0 -13.0 6.4 18.9
EPS   -91.21 -2.23 1.02 2.90
           
S/O   5.8 5.8 6.3 6.5

 

Valuation

 

First, there's the multiple of EV/AUM.  Traditional equity asset managers tend to trade between 2-5% of EV/AUM, you'll see this is the case with a comp list of : WDR, PZN, JNS, AMG, TROW, BEN, CLMS, GROW, EV.  But when you look at firm structure and asset class weights, again, Virtus looks a lot more like Legg Mason.  Legg trades at .7% EV/AUM, which is about the lowest it's been in years.  It's traded as high as 2.5%, and should probably trade around 1% EV/AUM.  Anyway, Virtus trades at a measly .4% EV/AUM.  This is nothing for an asset manager, even bond managers like Federated.  I don't care if Virtus' margins do lag the industry right now, that's a fixable problem.  This multiple of AUM, for a traditional manager, is silly.  Legg, despite being an essentially distressed firm nearly left for dead, is still managing to trade at almost 2x the valuation of Virtus.  Plus, Virtus has the value of the NOL's, which are worth about $40m.

 

What about future EPS and FCF?  I assume a couple of things here: the S&P returns to 1200 by 2011, fund flows are  4% per year, fee structures remain in tact, and expenses are brought under control further more like a level of Legg (I think they can get down to 20-23 bps of AUM from current 29 bps).  Even after dilution from .8 million options set aside for employees, EPS could reach $3.00 in 2011.  Slap a reasonable 15x P/E and you're looking at a 2 year price target of $45/share.  Also in this scenario, FCF would be somewhere around $25 million, as Virtus would be generating $30 million in EBITDA with minimal capex requirements.  Again, you can just assign a 10x FCF multiple to that and it's a $38/share target.

 

But the story hinges on expense control for a while.  Management needs to right-size their compensation to reflect a level that Legg, Waddell, et al operate with, which is about 20 bps of AUM.  Right now Virtus is operating between 25-30 bps, although management has aggressively cut costs in response to declines in AUM.  If management fails to adjust their company the stock will probably go nowhere.  But if they can simply hold onto assets and bring down costs to levels that should easily be attainable, I think there's serious upside here, perhaps triple the current price.

Catalyst

Earnings; Market improvements; Harris acquires the company

    sort by    

    Description

     

    Virtus Investment Partners is a recent spinoff that was done at a cheap price.  Some simple cost cutting and market improvements could help drive earnings which could triple the stock in 2 years.

     

    Company Background

     

    I'm guessing that even most VIC members, who are typically more attune to spinoffs than most people, probably missed this one.  Virtus was expelled from The Phoenix Companies (PHX) on 12/31/08 and began trading on the NASDAQ on 1/2/09.  Virtus is a relatively simple, if not boring asset management company.  It's an traditional manager with $22.6 billion in AUM as of 12/31 - 44% equity, 36% fixed income, 20% money market.  2/3rd of the assets are in mutual funds or closed end funds.  The firm's proprietary managers include the Virtus family of closed end and mutual funds, Duff & Phelps Investment Management, SCM Advisors, Kayne Anderson, Zweig Advisors, and one or two others.

     

    Virtus has 300 employees (though soon to be less) and a small advisory business that manages $3 billion in separate accounts.  63% of AUM are held in proprietary products while the remainder are subadvised.  They capture more fees with proprietary products, and on average Virtus earns about 40 bps on AUM (this is normal given the asset weights).  They also receive various fees for mutual fund sales such as 12b-1 fees.  This is basically the same business model as Legg Mason for all practical purposes, but without the SIV and debt headaches.

     

    Financials

     

    Virtus is in great shape.  They have $51 million cash, $6 million securities, a $20 million term loan owed to Phoenix which is due over the next 4 years, and a $45 million convert with a 8% coupon held by Harris Bank (Bank of Montreal).  Harris is more of a partner at this point as they're looking for better US distribution.  The convert is interesting to me.  Harris purchased this pre-spin.  Yes, the coupon is ridiculously high for a convert, but the conversion price is $26.  What is it that Harris sees here that would make them agree to a conversion price that's over 3x the spinoff price?? 

     

    Virtus also has $115 million in NOL's for now, so they wont be paying taxes anytime soon.  Plus, they're owed additional NOL's from Phoenix as part of the separation agreement.  The amount of the NOL wont be known until Phoenix files its tax return in September.  It's an odd situation that I cant get much color on.  I think that when you combine the NOL's with Harris' existing interest in Virtus, it shows that there's a decent chance that Harris will eventually buy them.

     

      2007 2008 2009 2010 2011
    AUM 40.4 22.6 25.8 29.4 32.0
               
    Revenues 226.2 178.2 138.4 161.1 179.9
    % of AUM   0.57% 0.57% 0.58% 0.59%
               
    Expenses 220.9 760.0 152.4 150.8 157.5
    % of AUM   2.41% 0.63% 0.55% 0.51%
               
    EBIT 5.3 -581.8 -14.0 10.3 22.5
    Margin 2.3% -326.5% -10.1% 6.4% 12.5%
               
    Other   52.8 4.7 -0.3 0.0
               
    Net Income   -529.0 -13.0 6.4 18.9
    EPS   -91.21 -2.23 1.02 2.90
               
    S/O   5.8 5.8 6.3 6.5

     

    Valuation

     

    First, there's the multiple of EV/AUM.  Traditional equity asset managers tend to trade between 2-5% of EV/AUM, you'll see this is the case with a comp list of : WDR, PZN, JNS, AMG, TROW, BEN, CLMS, GROW, EV.  But when you look at firm structure and asset class weights, again, Virtus looks a lot more like Legg Mason.  Legg trades at .7% EV/AUM, which is about the lowest it's been in years.  It's traded as high as 2.5%, and should probably trade around 1% EV/AUM.  Anyway, Virtus trades at a measly .4% EV/AUM.  This is nothing for an asset manager, even bond managers like Federated.  I don't care if Virtus' margins do lag the industry right now, that's a fixable problem.  This multiple of AUM, for a traditional manager, is silly.  Legg, despite being an essentially distressed firm nearly left for dead, is still managing to trade at almost 2x the valuation of Virtus.  Plus, Virtus has the value of the NOL's, which are worth about $40m.

     

    What about future EPS and FCF?  I assume a couple of things here: the S&P returns to 1200 by 2011, fund flows are  4% per year, fee structures remain in tact, and expenses are brought under control further more like a level of Legg (I think they can get down to 20-23 bps of AUM from current 29 bps).  Even after dilution from .8 million options set aside for employees, EPS could reach $3.00 in 2011.  Slap a reasonable 15x P/E and you're looking at a 2 year price target of $45/share.  Also in this scenario, FCF would be somewhere around $25 million, as Virtus would be generating $30 million in EBITDA with minimal capex requirements.  Again, you can just assign a 10x FCF multiple to that and it's a $38/share target.

     

    But the story hinges on expense control for a while.  Management needs to right-size their compensation to reflect a level that Legg, Waddell, et al operate with, which is about 20 bps of AUM.  Right now Virtus is operating between 25-30 bps, although management has aggressively cut costs in response to declines in AUM.  If management fails to adjust their company the stock will probably go nowhere.  But if they can simply hold onto assets and bring down costs to levels that should easily be attainable, I think there's serious upside here, perhaps triple the current price.

    Catalyst

    Earnings; Market improvements; Harris acquires the company

    Messages


    SubjectRE: I Own
    Entry05/08/2009 05:20 PM
    Memberutah1009

    Majic, where do you get that valuation of the NOL from?  This is something that I must have missed.  The problem is that there's so little dislocsure regarding the tax separation agreeement...at least I couldn't find much.  Any info you've got would be appreciated.  Thanks. 


    SubjectVRST
    Entry05/10/2009 10:43 AM
    Membergocanucks97

    Couple of Q's.

    1. fund outflows look pretty serious, even before '08. What gives you confidence that the tide will reverse to your 4% assumption? The fund performance numbers don't look inspiring.

    2. CEO has been there for a long time, and the division was never profitable. How much cost cutting can he really do especially given assets are shrinking? Also do those fund families run their own P&L and limit how much VRST can do?


    SubjectRE: RE: VRST
    Entry05/10/2009 09:10 PM
    Memberutah1009

    I agree with Majic on this.  Virtus isn't a sleek company, they arent best-in-class...I simply think the price is right and it's an interesting situation.  Regarding outflows, the best I can offer is that being a standalone company with their own shareholders to answer to (and two board seat from Harris) and their own stock options should refocus management.  And if current management isn't up for it, Harris will likely step in and acquire it.

     

    Fund performance has been so/so.  Some funds have been good, others not, and a lot are mediocre. Ordinary returns are my assumptions for the future.


    SubjectRE: key driver is AUM
    Entry05/13/2009 09:11 AM
    Memberutah1009

    Like I said, I merely assume the S&P claws its way back to 1200 by 2011 and that fund flows are minimal.  Management will be firing underperforming PM's.  There are too many PM's as it is, what with all the various shops.  Regardless, my numbers already assume rather significant dilution from options.  AUM only matters relative to the revenue/expense structure and stock price...you seem to be looking at AUM as an absolute.


    SubjectRE: key driver is AUM
    Entry05/13/2009 12:20 PM
    Memberfizz808

    ad188 must remember BKF all too well. i think this situation is clearly and distinctly different for the
    following reasons:

    Management is, in fact, highlighting their lowest AUM to PM ratio in the industry. They plan on culling their worst performing managers and reducing PM headcount. Their number of public funds has dropped from 52 to 48 in the past few months. Management talks about easily being able to get their expense structure and margins in-line with the industry now that they are independent and incentivized. Additionally, they do indeed plan to hand out significant restricted stock during bonus season in the coming years to reduce cash outflows. The mix of this will completely depend on where the stock is trading at the time of the grants relative to its intrinsic value. The CEO is acutely aware of the value of his company and will be unlikely to destroy value by handing out tons of dilutive shares/options at sub intrinsic prices. In speaking with people close to the company, I've heard these options and RSU's may have as long as 7 year vesting schedules.

    The CEO doesn't really worry too much about talent retention. Most of his PM's are average performers with modest resume's and unlikely to go out and start their own firms. Unlike BKF, there is no single PM, or group of PM's that could leave and compromise this business. In fact, management actually NEEDS to lose a chunk of these guys. Additionally, the company is finding many outside PM's looking for a home. They plan on offering the best of these groups a nice place to work and a fair back-loaded comp deal if they can build something organically. The CEO has no plans to spend any cash upfront to grow via this avenue.

    I believe that you hit the nail on the head; management in this case IS uniquely honest and is really running this business for the benefit of BMO, their 23% equity shareholder. The CEO, George, is a 44 year-old modest guy who lives in a very blue collar town in Western Mass, He put himself through state university, and worked his way up at Price Waterhouse as a CPA specializing in financial services. He spent 10 years working in various CFO/COO/accounting roles at Phoenix, until landing the CEO job at their Virtus division in 2007. George is at the office most weekends and always seems to have a razor sharp command of the numbers immediately recallable. I strongly encourage you to meet with him and make up your own mind. BMO guides/approves George's strategy as their largest
    investor and holder of 2 board seats- He will certainly get well paid for this role, but is very focused on delivering value to equity holders. The CFO is brand new and just getting his feel wet.

    In my analysis, I actually assume no AUM growth (certainly losing some AUM in Q1 given the S&P was down 11.7%) for this company, and continued modest performance of their funds. This story is 100% about margin improvement - going from worst to average. Their main focus for this business is retail - they currently have about 80% AUM there (and don't forget the LOCKED in closed end fund money).

    I also just read a great write-up on VRTS that was posted on www.sumzero.com


    SubjectQ1
    Entry05/13/2009 08:16 PM
    Memberutah1009

    It was predictably ugly overall.  Net flows fell by $500m, so at least there's some semblance of stabilization there.  Market movements looked normal given asset weights.  Cash got sucked out by a lot though to pay deferred comp.  Compensation level is being brought under control...not where it needs to be but definitely moving in the right direction.  Only troubling thing I saw was the investment management fee was unusually low as a % of AUM. 

     

    Separately, a contact of mine at Harris, though he doesn't know the details intimately, believes Harris made the investment because one or more of Virtus' money market funds was going to break the buck.  I didn't think this made much sense since by mid October the Treasury had already guaranteed the whole market.  Fizz/Majic, didn't know if you'd heard this rumor.


    SubjectQ2
    Entry08/14/2009 10:15 AM
    Membernha855

    Have you read the Q2 earnings announcement? Any thoughts?


    SubjectRE: Q2
    Entry08/16/2009 10:37 PM
    Memberutah1009

    Flipped through briefly so far.  On the plus side was the net flows finally turned positive and the asset mix shifted more away from money market.  On the other side of the ledger gross outflows were still frustratingly high and the income statement is still ugly.  I'm hoping these are baby steps in the right direction (time will tell) but it was an underwhelming quarter.


    SubjectRE: RE: utah/majic, any thoughts on 9/30 quarter
    Entry11/11/2009 10:58 AM
    Memberpaddy788

    Thanks majic, I appreciate the input.


    SubjectRE: RE: utah/majic, any thoughts on 9/30 quarter
    Entry11/11/2009 07:54 PM
    Memberutah1009

    I dont have much more to add.  Pretty much everything moved in the right direction, whether it was expenses, flows, performance, profitability, etc.  Good to see, I think the company is on the right path.  If they were to exit 2010 with about $30b in AUM I think they'd do about $27m in EBITDA, so a reasonable price target is still in the $30's.  I honestly thought the stock was going to be up significantly on the quarter, was surprised it did nothing.


    SubjectVRTS quarter
    Entry02/05/2010 11:43 AM
    Memberfizz808

    hey utah1009, what did you think of the quarter? looks like flows were strong and margins improving. what are we missing?

     

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