March 20, 2015 SEI Investments Co. Current Recommendation NEUTRAL Prior Recommendation Outperform Date of Last Change 09/30/2013 Current Price (03/19/15) $43.74 Target Price $46.00 SUMMARY DATA (SEIC-NASDAQ) SUMMARY SEI Investments fourth-quarter 2014 earnings surpassed the Zacks Consensus Estimate. Results gained from improvement in top line, partially offset by mounting expenses. Further, growth in assets under management remained strong. The company, backed by its global investment products and services, has been successfully generating revenues over the past several quarters. Moreover, robust asset inflows are expected to be accretive to the company s overall growth, going forward. Though the company s capital deployment activities remain impressive, its high dependence on fee-based revenues and weak expense management, along with stringent regulatory landscape, will likely weigh on its profitability in the quarters ahead. 52-Week High $44.15 52-Week Low $29.92 One-Year Return (%) 30.84 Beta 1.21 Average Daily Volume (sh) 533,218 Shares Outstanding (mil) 167 Market Capitalization ($mil) $7,305 Short Interest Ratio (days) 2.55 Institutional Ownership (%) 68 Insider Ownership (%) 23 Annual Cash Dividend $0.48 Dividend Yield (%) 1.10 5-Yr. Historical Growth Rates Sales (%) 6.0 Earnings Per Share (%) 9.6 Dividend (%) 24.0 using TTM EPS 23.1 using 2015 Estimate 20.7 using 2016 Estimate 18.1 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page Risk Level * Low, Type of Stock Large-Growth Industry Fin-Invest Mgmt Zacks Industry Rank * 109 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 271 A 275 A 281 A 299 A 1,126 A 2014 302 A 319 A 322 A 323 A 1,266 A 2015 328 E 338 E 346 E 355 E 1,367 E 2016 1,496 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.33 A $0.31 A $0.38 A $0.37 A $1.39 A 2014 $0.41 A $0.48 A $0.49 A $0.51 A $1.89 A 2015 $0.49 E $0.51 E $0.54 E $0.57 E $2.11 E 2016 $2.42 E Projected EPS Growth - Next 5 Years % 14 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
OVERVIEW SEI Investments Co. founded in 1968 is headquartered in Oaks, PA. This asset management company is a leading provider of wealth management business solutions in the financial services industry. The company offers investment processing, management and operations solutions. It has a broad clientele including big corporations, financial institutions and advisors, and high-net-worth families. As of Dec 31, 2014, the company served about 7,300 clients in the U.S., Canada, the U.K., continental Europe and other locations spread globally. SEI Investments administered $625.4 billion in mutual funds and pooled or separately managed assets as of Dec 31, 2014. It had $252.8 billion in assets under management (AUM) and $372.6 billion in client assets under administration as of the same date. Total AUM included $82.7 billion managed by its affiliate LSV Asset Management (LSV). SEI Investments operates through the following five business segments: Private Banks (constituting 35% of revenues in 2014) provide investment processing and investment management programs to banks and trust institutions across the globe, with independent wealth advisers in U.K. and financial advisors in Canada. Investment Advisors segment (22%) provides investment management programs to wealthy investors through a network of independently registered investment advisors, financial planners and other investment professionals in the U.S. Institutional Investors segment (22%) offers investment management programs and administrative outsourcing solutions to retirement plan sponsors, hospitals and non-profit organizations worldwide. Investment Managers segment (20%) provides investment operations and outsourcing solutions to investment managers, fund companies and banking institutions located in the U.S., and to investment managers of alternative asset classes and private equity funds across both registered and partnership structures worldwide. Investments in New Businesses segment (1%) provides investment management programs to ultra-high-net-worth families residing in the U.S. through the SEI Wealth Network and carries out other research and development activities. REASONS TO BUY SEI Investments has been witnessing consistent improvement in revenues for the past few years. Over the last 5 years (2010 2014), the company s revenue recorded a CAGR of 8.9%. The company s diversified product and revenue mix as well as its strong global presence reflect further organic growth prospects in the forthcoming quarters. Moreover, SEI Investments is a sound asset for yield-seeking investors. In Dec 2014, the company hiked its semi-annual dividend by 9% to $0.24 per share with the last dividend increase of 10% made in Dec 2013. Moreover, on the same date, the company added $100 million in its existing share repurchase program, which raised the authorization to around $131 million. Presently, the company has $102.7 million remaining under the program. Notably, during 2014, the company returned about $350 million to its shareholders through dividends and buybacks. Equity Research SEIC Page 2
Going forward, efficient capital deployment activities will continue to boost investors confidence in the stock. SEI Investments SEI Wealth Platform, through which the company delivers investment processing solutions, recently gained momentum in the U.K. as well as the U.S. Since its inception in 2007, the company has signed 20 independent wealth advisors in the U.K and 10 banks in the U.S. In 2014, the company converted two client tranches, and looks forward to convert a larger tranche by the end of 2015. Based on expectations of revenue from the platform in 2015 as well as alignment of interest with clients, we believe the company s business is slated to grow as it client base broadens. Asset inflows at SEI Investments remain robust. The company has registered a rising trend in its total assets under management and administration over the last several years $625.4 billion in 2014, $559.2 billion in 2013, $458.4 billion in 2012 and $403.6 billion in 2011. Though the overall equity market remains volatile, this investment manager is well positioned to benefit from the same. Therefore, we expect asset inflows to continue contributing significantly to earnings growth. REASONS TO SELL Continuously rising expenses remain a major cause of concern for SEI Investments. Expenses increased at a CAGR of 8.1% over the last 3 years (2012 2014). Growing compensation costs and performance fees are primarily responsible for the rising expenses. Moreover, as the company continues to build its operational infrastructure, expenses are unlikely to decrease in the near term. Asset management, administration and distribution fees are the major revenue-generators for SEI Investments. These comprised about 75% of total revenue in 2014, 74% in 2013 and 73% in 2012. The increasing dependence on fee-based revenues could adversely affect the company s financials in the near term as fluctuations in markets and foreign exchange translations, regulatory changes or a sudden slowdown in overall business activities may hamper its AUM. In 2012, SEI Investments had entered into a 5-year $300 million Credit Agreement with Wells Fargo Bank and an association of several other lenders. The senior unsecured revolving line of credit, which is scheduled to expire in Feb 2017, imposes certain restrictions on the company. Such restrictions may affect the company s ability to raise additional debt, pursue inorganic expansion and restructure operations. In case of default, the company will be barred from engaging in any sort of capital deployment activities. RECENT NEWS SEI Investments' Q4 Earnings Beat on Top-Line Growth Jan 29, 2015 SEI Investments fourth-quarter 2014 adjusted earnings per share of $0.51 beat the Zacks Consensus Estimate of $0.48. Moreover, the reported figure was up 38% from the year-ago quarter. Current-quarter earnings were adjusted for a one-time after-tax charge associated with the write down of an equity investment. Robust growth in the top line continued to be the main contributor toward the better-than-expected results. Moreover, the asset position reflected consistent improvement. However, weak expense management was on the downside. Equity Research SEIC Page 3
After considering the non-recurring charge, net income attributable to common shareholders rose 18% year over year to $77.1 million. For 2014, net income attributable to common shareholders climbed 11% year over year to $318.7 million. Behind the Headlines Revenues at SEI Investments grew 8% year over year to $322.8 million. The improvement was mainly driven by an increase in asset management, administration and distribution fees as well as elevated cash flows. However, the figure missed the Zacks Consensus Estimate of $328.0 million. For 2014, revenues rose 12% year over year to $1.27 billion. Further, it came in line with the Zacks Consensus Estimate. Total expenses amounted to $232.5 million, up 1% from the prior-year quarter. The expense rise primarily resulted from higher subadvisory, distribution and other asset management costs, compensation, benefits and other personnel, brokerage commissions as well as amortization costs. These were, however, partly mitigated by a reduction in stock-based compensation, data processing and computer-related expenses as well as facilities, supplies and other costs. Operating income surged 32% year over year to $90.3 million. As of Dec 31, 2014, AUM grew 9% year over year to $252.7 billion. Total client AUM was recorded at $372.6 billion, up 14% year over year. Share Repurchase In the reported quarter, SEI Investments bought back 1.6 million shares of its common stock for $62.6 million. Dividend Update On Dec 9, 2014, SEI Investments announced a regular semi-annual dividend of $0.24 per share. The dividend was paid on Jan 6, 2015 to shareholders of record on Dec 22, 2014. Equity Research SEIC Page 4
VALUATION SEI Investments currently trades at 20.7x the Zacks Consensus Estimate for 2015, 50% above the industry average of 13.8x. On a price-to-book basis, the shares trade at 5.8x, 70.6% premium to the 3.4x for the industry average. Hence, the valuation, both on price-to-book and price-to-earnings basis, looks expensive. However, SEI Investments has a trailing 12-month ROE of 26.6% compared to industry average of 19.9%. This implies that the company reinvests its earnings more efficiently than its industry peers. Our six-month target price of $46.00 per share equates to 21.8x the Zacks Consensus Estimate for 2015. Combined with the annual dividend of $0.48 per share, this price target implies an expected total return of 5.7% over that period, which is consistent with our Neutral recommendation. Also, SEI Investments carries a Zacks Rank #3 (Hold). Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low SEI Investments Co. (SEIC) 20.7 18.1 14.0 19.0 23.1 25.3 12.8 Industry Average 13.8 12.7 12.1 20.8 20.1 91.7 12.9 S&P 500 16.7 15.6 10.7 14.5 18.3 18.4 12.0 Eaton Vance Corp. (EV) 16.7 14.7 11.4 14.4 16.9 26.8 12.9 Och-Ziff Capital Management Group LLC (OZM) 7.9 6.8 N/A 3.0 6.8 20.7 5.9 KKR & Co. L.P. (KKR) 8.6 8.1 11.0 6.7 11.5 19.4 3.4 Janus Capital Group, Inc. (JNS) 18.2 13.4 19.9 15.6 21.5 21.7 7.0 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA SEI Investments Co. (SEIC) 5.8 5.8 2.6 26.6 0.0 1.1 12.1 Industry Average 3.4 3.4 3.4 19.9 0.6 4.0 10.9 S&P 500 6.2 9.8 3.2 25.4 N/A 2.0 N/A Equity Research SEIC Page 5
Earnings Surprise and Estimate Revision History Equity Research SEIC Page 6
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of SEIC. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1133 companies covered: Outperform - 15.2%, Neutral - 75.0%, Underperform 9.0%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Team Coverage QCA Lead Analyst Analyst Copy Editor Content Ed. 11A Kalyan Nandy Swayta D. Shah Pooja Patel Anuja Mitra Swayta D. Shah Equity Research SEIC Page 7