(By Kevin Donovan) With central banks around the world inclined to be accommodative and corporations sitting on piles of cash, we think investment banks and fund managers with world-class talent are poised to reap the benefits. The Blackstone Group L.P. (BX) fits that bill.
The most visible star of Blackstone's talent pool is Byron Wien, vice chairman of the company's Blackstone Advisory Partners L.P. unit. Wien has been a Wall Street sage for decades, notably with Morgan Stanley, and is known for his "10 Surprises" unveiled shortly after January 1 every year. It's proven to be a popular parlor game in which Wien spells out, often with wry wit, some events or trends he thinks the market doesn't expect in the coming year. One of the predictions for 2012 has already proven prescient – the retreat in oil prices to the $80s.
We're no Byron Wien, but we predict Blackstone stock will reach our $22 target by 2013, largely because of valuation. The Trian Fund Management investors recently highlighted Lazard as an investment company they thought could double in price. It was a compelling argument that we think applies equally, if not more so, to Blackstone.
Briefly, here's our reasoning. Blackstone trades at a forward PE of 6.10, vs. forward multiples of 12.74 for Lazard (LAZ), 13.70 for Greenhill (GHL) and 11.21 for Evercore (EVC), companies that are close in size and business model. Applying an average multiple of 10.9 for these four firms to analysts' mean estimate of $2.04 in EPS for Blackstone next year, we derive a target price of $22, 83% above the recent price. Blackstone's units have traded between $10.20 and $17.11 in the past 52 weeks.
And investors get paid while waiting for capital appreciation, as Blackstone sports a dividend yield of 3.22%, comparable to competitors.
Blackstone bills itself as "leader in alternative asset management" that counts top institutional investors among its clients. It manages more than $190 billion in assets for public and corporate pension funds, academic, cultural and charitable organizations, among others. Its funds also make private equity, real estate, credit and hedge fund investments throughout the world.
The other half of its business is advising on mergers and acquisitions, restructuring and reorganization assignments for corporate and government clients.
We think the lack of prospects for corporations to grow organically combined with balance sheets bulging with cash sets the stage for merger and acquisition activity to pick up. Blackstone's standing as a savvy investor and an independent advisor without the baggage of a sell-side bulge-bracket firm should stand it in good stead if M&A heats up.
Also, the Federal Reserve's extension of "Operation Twist" through the end of year should keep long-term rates low, if not push them a bit lower, another factor that could persuade companies to take on debt to buy assets.
There are risks, of course, chief among them being the outlook for economic growth in the U.S. and abroad. The sclerosis of the Old World, if not excised or ameliorated, could spread to the U.S. and dampen appetite for corporate growth, as well as making hedge fund investing tougher. We're not worried, though. One of Byron Wien's surprises for 2012 is stronger U.S. economic growth of 3%. He may miss, but we think the odds are growth will indeed pick up from the 1.9% rate seen in the first quarter given the decline in oil prices. And Byron's already got that one right