KKR: Overvalued Due To Rapid Multiple Expansion Despite S&P 500 Entrance

seekingalpha06-19

KKR continues to deliver in terms of AUM growth, and their full acquisition of Global Atlantic adds tailwinds and synergies to achieve their ambition of $1 trillion AUM by 2029.KKR has achieved a ...

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Entrance\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-06-19 08:26 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4699914-kkr-overvalued-due-to-rapid-multiple-expansion-despite-sp-500-entrance><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>KKR continues to deliver in terms of AUM growth, and their full acquisition of Global Atlantic adds tailwinds and synergies to achieve their ambition of $1 trillion AUM by 2029.KKR has achieved a ...</p>\n\n<a href=\"https://seekingalpha.com/article/4699914-kkr-overvalued-due-to-rapid-multiple-expansion-despite-sp-500-entrance\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BX","symbol_name":"黑石","start_time":0,"source_url":"https://seekingalpha.com/article/4699914-kkr-overvalued-due-to-rapid-multiple-expansion-despite-sp-500-entrance","article_id":"2444493739","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1555236191/image_1555236191.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2444493739","pubTimestamp":1718756808,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"KKR continues to deliver in terms of AUM growth, and their full acquisition of Global Atlantic adds tailwinds and synergies to achieve their ambition of $1 trillion AUM by 2029.KKR has achieved a 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A"},"translate_title":"KKR：尽管进入标普500，但由于倍数快速扩张，估值被高估","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"KCE":1,"VOO":1,"SPY":1,"KKR":1,"KIE":1,".SPX":1,"BX":1,"APO":1,"OEF":0.6,"OEX":0.6,"SDS":0.6,"SH":0.6,"SPXU":0.6,"SSO":0.6,"UPRO":0.6,"ESmain":0.6,"IVV":0.6},"content_text":"KKR continues to deliver in terms of AUM growth, and their full acquisition of Global Atlantic adds tailwinds and synergies to achieve their ambition of $1 trillion AUM by 2029.KKR has achieved a stellar performance of 92.5% over the past year, but this increase in price is far superior to the growth of key metrics, expanding their multiples significantly.Although KKR is a company that matches long-term holding criteria, its current valuation of 38.9x fee-related earnings makes it more of a wait-to-buy stock until key multiples contract.   PrathanChorruangsak/iStock via Getty Images KKR & Co. (NYSE:KKR), which holds the last name initials of its founders, Kohlberg, Kravis, and Roberts, is the second largest purely alternative asset manager in the world after Blackstone (BX). With a valuation of $96.89 billion and a TTM net income of $4.07 billion, it was recently announced that the company will enter the S&P 500. In Q1, revenue doubled to $10,621.4 from $5,860.1 in Q4 after the company bought the remaining shares of Global Atlantic. Before this, KKR owned 63% of the shares from a position initiated in 2021. In this analysis, I will go to the segment overview of the company, its trends in key financial figures, price action, and valuation to decide on a hold rating for the stock. Segment Overview KKR is divided into three operating segments: Asset Management, Insurance, and Strategic Holdings. As commented, KKR now includes all of Global Atlantic's Q1 revenue of $7.70 billion as part of theirs and the $7.69 billion in expenses exhibited in Q1. The image below portrays how KKR achieves its net income. Just keep in mind that Asset Management and Strategic Holdings are displayed together, but they are indeed different segments. Strategic Holdings is a new segment created in Q1 that used to be part of the Asset Management segment. GuruFocus 1. Asset Management KKR Q1 Presentation Over the years, KKR has aggressively expanded its alternative product offering. In 2010, they only had four strategies; North America PE, Europe PE, Asia PE, and Leveraged Credit. Whereas now encompasses a much more extensive list of 39 strategies classified within Private Equity, Real Assets, and Credit and Liquid Strategies. The graph above shows that the AUM growth has been stellar and multiplied by nine times since that vintage. At the same time, the AUM split is well distributed among different strategies, which helps reduce the investment performance risks of the embedded alternative funds as a whole. Capital Markets and Principal Activities are also within this segment. For example, Capital Markets arranges debt and equity offerings to global clients and generated 76 debt offerings and 9 equity offerings in Q1, yielding $115.7 million in transaction fees. Additionally, Principal Activities contains KKR's own positions in its fund, excluding Core Private Equity investments, as this strategy was moved to the Strategic Holdings segment. KKR 2024 Investor Day Considering the AUM growth displayed before, this would've not come without outstanding performance. Of the 17 matured funds displayed above, all have outperformed their respective benchmarks on a gross basis, with some doing so by a larger amount, as is the case for the Asia III PE fund, which outperformed the benchmark by 26%. 2. Insurance KKR Q1 Presentation The insurance segment began in Q1 2021 and expanded in Q1 2024 after KKR decided to acquire all the shares of Global Atlantic after their initial position. This insurer combines well synergies with the asset manager as their core offerings require long-term investments, which KKR offers and is the case for retirement and life insurance policies. Their client type is both individual and institutional. For the first one, they provide classical annuities and targeted life products sold via a network of brokers and banks; for the second one, they offer reinsurance solutions to institutional clients. Global Atlantic has over three million policyholders, $177 billion AUM, $1.2 billion in TTM operating earnings, and a spectacular AUM CAGR of 27% from 2Q 2020. 3. Strategic Holdings As commented, Strategic Holdings is KKR's new reporting segment, but it was part of KKR's Principal Activities business line. This new segment represents KKR's participation only in its core private equity strategy. Additionally, they pay the same fee structure as any other client and generate income based on dividends that are reported net of management fees. Furthermore, if the fund realizes distributions, the profit would be reported net of performance fees in the strategic holdings segment. KKR Q1 presentation In their presentation, the company describes its core private equity strategy with the following eight characteristics; 1. Long Duration 2. Lower Leverage Over Hold Period 3. High-Quality Management 4. More Limited External Exposures 5. Cash Generative 6. More Limited Disruptors 7. Less Cyclical 8. Control In essence, the holdings and IPS characteristics are more of a value play than finding the next big tech player that could bring 100 baggers. Following Q1, this segment generated $20.72 million in dividends net of management fees and realized no investments on the $6.841 billion they hold in assets. Something to note is that $7.5 million was paid in intersegment management fees, which implies a quarterly fee of 0.3% from the Asset Management segment. At the same time, dividend payments are not the focus of their strategy, as the dividend yield sits at 1.21% from there. Simultaneously, assets of that segment grew 20.0% YoY. KKR KPI Growth Q1 FinChat When looking at relevant KPIs, in Q1, KKR reported Fee-Paying AUM (FPAUM) at $470.6 billion, representing a YoY change of 13.2%. As seen in the graph above, this growth has been the highest compared to the preceding four quarters, and on average, the FPAUM growth has been 13.4% during that time frame. Using my old school BA II Plus financial calculator, at this growth rate, it will take a bit less than 23 quarters for KKR to hit the $1 trillion fee-paying AUM mark, meaning Q4 of 2029, which is consistent with the estimate draw in the presentation (although they were referring to total AUM, not fee-paying AUM). Following, Fee-related Earnings (FRE) sat at $668.7 million in Q1, recovering with an elevated growth of 21.9% from the year prior, when FRE was reported at $548.6 million and at that time had a YoY decline of -9.3% from the $600.9 million experienced in Q1 of 2022. Altogether, the average YoY growth of FRE during the last quarters has been of 13.4%. Even though the insurance division marks 72.5% of the revenue (after the full acquisition of Global Atlantic) in terms of EBIT, it falls to 20.0%. While the asset management segment accounts for 63.2% of the EBIT. Therefore, the previous KPIs are by far the core metrics of the asset manager, even though they don't seem so based on the revenue composition. Now, when comparing the average YoY growth of FRE and FPAUM to competitor Apollo (APO), KKR ranks second in terms of momentum. On average, the fee-related earnings of Apollo have grown at 23.9% vs. 21.9% of KKR, and FPAUM has done it at 18.4% vs. 13.4%. KKR Long-Term Projections KKR Q1 Presentation The growth projections of KKR are quite ambitious, but looking at their track record and the expected surge in alternative asset allocations, I see them pretty achievable. From the side of AUM, the company intends to accomplish in 2029 the $1 trillion AUM mark in their Asset Management segment that competitor Blackstone recently achieved. This goal would require a CAGR of 11.6% over the next five years based on the current AUM of $578 billion. Moving to the Insurance business, KKR didn't set a deadline, but they believe they can double the AUM of Global Atlantic once again, as they did after the acquisition in roughly four years. Last, and probably most challenging, KKR targets to set the operating contribution of Strategic Holdings to more than $1 billion by 2030, which is more than 28x times the current $35.3 million in operating earnings achieved in Q1 24 TTM. KKR Price Action Data by YCharts Over the last year, the stock of KKR has experienced a remarkable price appreciation of 92.5% (including dividends). As seen in the graph above, the rally started in November, which coincided with the price ramp-up of many financial stocks after Jerome Powell put further rate increases into question. Recently, some of their catalysts have been,   Their inclusion in the S&P 500 index made the stock price jump 11.18%. This will improve the liquidity of the security and mandatory purchasing demand from passive funds and   A report released by Citi analyst Craig Siegenthaler expects higher inflows of $33 billion in Q2.   Simultaneously, KKR's performance vastly outperformed the ones exhibited in its natural benchmarks, Capital Markets (KCE) and Insurance (KIE), and outpaced competitor Apollo by 39.4% percentage points.  KKR Valuation    KKR Q1 2023 Q1 2024 Change   Stock Price (06/14) $57.03 $109.18 91.4%   P/FRE 24.0x 38.9x 62.1%   P/TOE 17.4x 28.4x 63.1%   P/ANI 15.5x 30.5x 96.3%   Click to enlarge KKR IR Unfortunately, the stock price stellar performance has come with multiple expansion in key metrics, making the company significantly more expensive to own than it was a year ago. For adjusted per share metrics, the company points to related earnings (FRE), total operating earnings (TOE), and adjusted net income (ANI) as their key metrics in their presentation. On a TTM YoY basis, FRE and TOE gained 18% and 17%, respectively. Meanwhile, ANI decreased by 2% in TTM Q1 from the previous year, mainly because of lower realized investments. With these movements in key metrics and a price ramp-up, the price-to-FRE now sits at 38.9x, which is significantly higher than the 24.0x exhibited a year ago, and in the case of price-to-ANI, it almost doubled from the year before to 30.5x.    Apollo Q1 2023 Q1 2024 Change   Stock Price (06/14) $73.64 $115.87 57.3%   P/FRE 29.5x 38.6x 31.1%   P/ANI 13.9x 16.5x 18.7%   Click to enlarge Apollo IR When analyzing the peer Apollo (APO), things look different. Apollo in TTM Q1 grew FRE and ANI at higher rates than KKR at 20% and 30%, respectively, and their multiples didn't expand with the same intensity as KKR. Of course, KKR had other non-financial tailwinds, such as the inclusion to the S&P 500, but even when adjusting Apollo's 1Y performance with the one of KKR, the multiple price-to-ANI multiple expansion would've been of 44.4% vs. the 96.3% of KKR.   Author's compilations | Data: Seeking Alpha Consistently, with the YoY expansion observation, Seeking Alpha assigns an F quant rating to the company, and it is noticeable that other multiples are also trading considerably above their average. Of course, this five-year average has many regime period biases, especially within the price to sales due to the full acquisition of Global Atlantic, which boosted revenues. Nonetheless, the clear conclusion is the multiple expansion in all metrics except for the dividend yield and the forward PEG. Seeking Alpha At the same time, their quant revision grade from Seeking Alpha sports a poor history compared to the sector median. Over the last 90 days, 15 revisions were to the downside. While just two were to the upside. Conclusion  KKR is benefiting from the alternative momentum, so they have achieved remarkable AUM growth. They have a great tone when discussing growth, and their full acquisition of Global Atlantic will bring long-term synergies and constant inflows from policyholders. In addition, the company adjusted its fee structure. It will derive most of its revenues from management fees and less from carry, which, in my opinion, is an excellent move as it reduces the volatility of the bottom line and allows internal financial analysts to conduct investment forecasts with less uncertainty on future projects. But besides these long-term tailwinds, I don't think KKR is a buy now due to the elevated multiple expansion exhibited during the last year. Although their PEG ratio remains below one, and it's 38.9% lower than their historical average, I don't think this is enough to counter the other metrics, such as price-to-fee related earnings and price-to-adjustable net income. 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