March 10, 2015 Invesco Ltd. (IVZ-NYSE) Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Underperform Date of Last Change 10/03/2012 Current Price (03/09/15) $40.40 Target Price $42.00 52-Week High $41.28 52-Week Low $34.09 One-Year Return (%) 18.37 Beta 2.07 Average Daily Volume (sh) 2,448,994 Shares Outstanding (mil) 429 Market Capitalization ($mil) $17,332 Short Interest Ratio (days) 0.83 Institutional Ownership (%) 87 Insider Ownership (%) 2 Annual Cash Dividend $1.00 Dividend Yield (%) 2.48 5-Yr. Historical Growth Rates Sales (%) 11.3 Earnings Per Share (%) 18.7 Dividend (%) 24.5 using TTM EPS 16.1 using 2015 Estimate 15.2 using 2016 Estimate 13.2 Zacks Rank *: Short Term 1 3 months outlook 4 - Sell * Definition / Disclosure on last page SUMMARY Invesco s fourth-quarter 2014 adjusted earnings surpassed the Zacks Consensus Estimate. Higher revenues driven by consistent growth in assets under management (AUM) and robust net inflows were partially offset by mounting expenses. The company s diversified footprint and product offering makes it well positioned for future growth, and will facilitate gain from enhanced global investment flows. Further, steady capital deployment activities will continue to boost shareholders confidence. Also, the company s cost-control initiatives look promising and will likely perk up operating leverage in the long run. However, high debt levels and rising operating expenses remain matters of concern. Risk Level * Below Avg., Type of Stock Large-Blend Industry Fin-Invest Mgmt Zacks Industry Rank * 116 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 788 A 790 A 816 A 857 A 3,251 A 2014 888 A 901 A 914 A 906 A 3,609 A 2015 938 E 952 E 999 E 1,050 E 3,939 E 2016 4,340 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 $0.50 A $0.50 A $0.55 A $0.58 A $2.13 A 2014 $0.60 A $0.64 A $0.64 A $0.63 A $2.51 A 2015 $0.61 E $0.64 E $0.69 E $0.71 E $2.65 E 2016 $3.07 E Projected EPS Growth - Next 5 Years % 13 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
OVERVIEW Headquartered in Atlanta, GA, Invesco Ltd., formerly AMVESCAP PLC operates as an independent investment manager and offers a wide range of investment products and services. The company was incepted in 1935. Invesco s investment products are sold under the brand names Invesco, Invesco Perpetual, PowerShares, Trimark and WL Ross & Co. With the support of a global operating platform, the company distributes a broad range of investment products and services. Invesco s asset classes include money market, fixed income, balanced income, equity and alternatives. Invesco sells its products through two principal distribution channels: Retail: Invesco offers retail products within all of the major asset classes in the form of mutual funds, separately managed accounts, variable annuities, collective trusts and ETFs. The retail product management teams collectively managed $532.5 billion in assets as of Dec 31, 2014. Institutional: Invesco offers a broad range of domestic and global products to institutional investors, which include traditional equities, structured equities, fixed income, real estate, private equity, financial structures and absolute return strategies. AUM for this channel totaled $259.9 billion as of Dec 31, 2014. In 2010, Invesco completed the Van Kampen/Morgan Stanley deal, making Morgan Stanley the largest shareholder of the company. The $1.5 billion acquisition was completed with cash and equity. In 2013, Invesco divested Atlantic Trust Private Wealth Management to Canadian Imperial Bank of Commerce. As of Dec 31, 2014, Invesco had offices in more than 20 countries and worldwide AUM worth $792.4 billion. REASONS TO BUY Invesco s consistent top-line growth looks impressive with net revenue growing at a 5-year CAGR of 10.5% (2010 2014). We believe that the company s diverse product offerings and alternative investment strategies will continue to attract investors, thereby supporting top-line growth in the quarters to follow. Moreover, a strong institutional pipeline, along with solid retail channel, is expected to support revenue growth. Invesco is an asset for yield-seeking investors as it is actively involved in capital deployment activities. Since 2009, the company has been increasing its dividend every year. In May 2014, the company hiked its quarterly dividend by about 11.1% to $0.25 per share and thereafter maintained the same level. Further, it has an effective share repurchase program in place. As of Dec 31, 2014, the company had nearly $1.2 billion worth of shares left to be repurchased under this plan. Invesco has been witnessing consistent improvement in total AUM as well. Over the last five years (2010 2014), AUM had recorded a CAGR of 7.2%. Though preliminary January 2015 month-end AUM decreased marginally from the preceding month, we believe that AUM will continue to improve as the company is well positioned to benefit from the prevalent volatility in the equity market. Equity Research IVZ Page 2
Invesco is well positioned to capitalize on the growing interest in passive products and alternative asset classes. Given the present low interest rate environment and equity market volatility, investors have been shifting focus to passive products. Notably, AUM under passive management constituted 17.8% of the company s total AUM in 2014, and has exhibited a robust upward trend, growing at a 3-year CAGR of 11.4% (2012 2014). Moreover, alternative products, as an asset class, formed 12.5% of the total AUM in 2014. We expect the company to benefit from the increasing demand of such products. Apart from strong presence in the U.S., Invesco maintains a solid foothold in Europe and the Asia-Pacific as well. As of Dec 31, 2014, the company s client AUM from outside the U.S was 32.9% of the total AUM, with the client base spread across more than 100 countries. Going forward, the company intends to continue focusing on Europe, the Middle East and Africa (EMEA) thereby generating further momentum from business in these regions. With the international and emerging markets growing at a relatively faster pace than the U.S., the company s widening global presence, along with its broad diversification, reflects significant long-term growth prospects. REASONS TO SELL Escalating operating expenses remain a concern for Invesco. Expenses have been rising at a 3- year CAGR of 9.8% (2012 2014). Notably, the company anticipates expenses to escalate in the upcoming quarters. Though Invesco has initiated measures to reduce costs, the impact is not expected to be felt any time soon as the company continues to invest in franchise. High debt level of the company could restrict it from procuring additional finance for working capital, capital expenditures, acquisitions, debt service requirements or other purposes. As of Dec 31, 2014, Invesco s total long-term debt grew modestly year over year to $1.6 billion (7.7% of total assets). The company is exposed to unfavorable economic and industry conditions, which combined with its high debt obligation, might drag it to a relatively disadvantageous position. The goodwill and intangible assets in Invesco s balance sheet are subject to annual impairment reviews. As of Dec 31, 2014, goodwill and intangible assets declined from the year-ago level, totaling $6.6 billion and $1.2 billion, respectively. Several factors may initiate the impairment of the book value of such assets, due to which their value may have to be written down. This will adversely affect the company s financials. Invesco remains highly exposed to regulatory reforms in the domestic as well as international markets it serves. Imposition of such rules may require the company to dismiss certain business activities, reduce its flexibility to invest capital, or even lead to enforcement of actions like revocation of licenses. Compliance with regulatory rules in such a wide market can adversely impact Invesco s revenues and profitability in the quarters ahead. RECENT NEWS Invesco Tops Q4 Earnings on Higher Revenues, Expenses Up Jan 29, 2015 Driven by strong top-line growth, Invesco reported fourth-quarter 2014 adjusted earnings of $0.63 per share. The company surpassed the Zacks Consensus Estimate by $0.01, marking its sixth consecutive earnings beat. The bottom line also came in 8.6% above the prior-year quarter figure. Equity Research IVZ Page 3
For 2014, adjusted earnings of $2.51 per share were in line with the Zacks Consensus Estimate. Further, this came in 17.8% above the prior-year figure. Higher revenues and robust long-term net inflows were largely responsible for better-than-expected results. However, a rise in operating expenses slightly dampened the bottom-line growth. Notably, consistent growth in AUM, along with steady capital deployment activities, continued to be the strong factor. On a GAAP basis, net income attributable to common shareholders came in at $269.8 million or $0.62 per share, compared with $287.4 million or $0.64 per share in the year-ago quarter. For 2014, net income was $988.1 million or $2.27 per share, compared with $940.3 million or $2.10 per share in the prior year. Performance in Detail Adjusted net revenue climbed 5.7% year over year to $905.8 million. The rise was driven by an increase in all components of revenue, except service and distribution fees. However, the figure came below the Zacks Consensus Estimate of $1.3 billion. Adjusted net revenue in 2014 rose 11% year over year to $3.6 billion. Nevertheless, the figure significantly lagged the Zacks Consensus Estimate of $5.2 billion. Adjusted operating expenses increased 4.4% year over year to $532.7 million. The surge in expenses resulted from a rise in all expense components. Adjusted operating margin for the quarter stood at 41.2% versus 40.5% in the year-ago quarter. As of Dec 31, 2014, AUM rose 1.8% year over year to $792.4 billion. Average AUM for the quarter totaled $789.8 billion, up 3.7% from the prior-year quarter. Moreover, long-term net inflows amounted to $2.5 billion compared with an inflow of $1.0 billion in the prior-year quarter. As of Dec 31, 2014, cash and cash equivalents summed $1,514.2 million, compared with $1,331.2 million as of Dec 31, 2013. Total long-term debt stood at $1,589.3 million as of Dec 31, 2014, almost unchanged compared with the Dec 31, 2013 level. Capital Deployment Update In the reported quarter, Invesco repurchased shares worth $50.0 million at an average price of $40.55 per share. Overall, year-to-date repurchases amount to $269.6 million representing 7.4 million shares. Dividend Update On Jan 29, Invesco announced a quarterly cash dividend of $0.25 per share. The dividend was paid on Mar 6 to shareholders of record as on Feb 19, with an ex-dividend date of Feb 17. Equity Research IVZ Page 4
VALUATION Invesco currently trades at 15.2x the Zacks Consensus Estimate for 2015, 10.9% above the industry average of 13.7x. On a price-to-book basis, the shares trade at 1.9x, a 44.1% discount to the 3.4x for the industry average. Hence, the valuation on price-to-book basis looks attractive. Our six-month target price of $42.00 per share equates to about 15.8x the Zacks Consensus Estimate for 2015. Combined with the annual dividend of $1.00 per share, this target price implies an expected total return of 5.2% over that period, which is consistent with our Neutral recommendation. Currently, Invesco carries a Zacks Rank #4 (Sell). Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Invesco Ltd. (IVZ) 15.2 13.2 13.0 14.6 16.1 24.5 9.1 Industry Average 13.7 12.6 12.0 21.6 20.0 91.7 12.8 S&P 500 16.5 15.4 10.7 14.6 18.1 18.4 12.0 The Blackstone Group L.P. (BX) 10.6 10.7 7.2 4.5 10.3 20.7 7.2 Grupo Aval Acciones Y Valores S.A. (AVAL) 9.0 7.7 N/A N/A N/A N/A N/A T. Rowe Price Group, Inc. (TROW) 16.9 15.2 13.0 16.3 18.3 28.5 16.4 The Carlyle Group LP (CG) 12.8 11.4 6.0 1.6 10.1 22.5 7.4 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 Invesco Ltd. (IVZ) 1.9 1.9 0.8 11.8 0.7 2.5 13.0 Industry Average 3.4 3.4 3.4 19.9 0.5 4.0 10.7 S&P 500 6.2 9.8 3.2 25.4 2.0 Equity Research IVZ Page 5
Earnings Surprise and Estimate Revision History Equity Research IVZ Page 6
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of IVZ. 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 1128 companies covered: Outperform - 15.6%, Neutral - 74.9%, Underperform 8.7%. 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 QCA Lead Analyst Analyst Copy Editor Content Ed. 11A Kalyan Nandy Swayta D. Shah Pooja Patel Anuja Mitra Swayta D. Shah Equity Research IVZ Page 7