Affiliated Managers (AMG) Q1 Earnings: A Beat In Store?

We expect Affiliated Managers Group Inc. (NYSE:AMG) to beat expectations when it reports first-quarter 2016 results on May 3, before the market opens.

Why a Likely Positive Surprise?

Our proven model shows that Affiliated Managers is likely to beat earnings as it has the right combination of two key components. Note that a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or #2 (Buy) or at least #3 (Hold) to have a significantly higher chance of beating earnings.

Zacks ESP: The Earnings ESP for Affiliated Managers is +0.68%. This is because the Most Accurate estimate of $2.96 is above the Zacks Consensus Estimate of $2.94.

Zacks Rank: Affiliated Managers’ Zacks Rank #2 increases the predictive power of ESP. The combination of the company’s Zacks Rank #2 and a positive ESP makes us confident of an earnings beat.

Notably, the company delivered positive surprises in three of the prior four quarters, with an average beat of 1.01%.

Factors to Drive Q1 Results

Affiliated Managers holds an almost unbeaten track record of buying equity interests in asset management companies with strong performance-oriented products. During the first quarter, the company announced completion of three major agreements to acquire equity stakes in Systematica Investments LP, Ivory Investment Management, L.P. and Abax Investments (Pty) Ltd.

We believe this and all other past equity investments should continue to boost the company’s top line, driven by excellent long-term performance of its affiliates.

Moreover, management estimates the ratio of earnings before interest, taxes, depreciation and amortization (“EBITDA”) contribution at end-of-period AUM for the quarter to be around 13.6 basis points (bps), which includes the full run rate impact of the new investments. Also, the company projects other economic items to be around $1 million per quarter.

On the performance fees front, management expects growth in the existing alternative products along with the addition of the new products to aid performance fee to grow modestly as a percentage of the earnings base in 2016. This should be reflected in the upcoming release as well.

On the cost front, Affiliated Managers expects total interest expenses to increase sequentially to $22.0 million in the quarter due to higher revolver balances from the financing of the new investments. Further, the company expects amortization expenses to rise sequentially to $34 million attributable to the addition of new investments.

Further, management envisions GAAP tax rate in the quarter to be about 33% and the cash tax rate to be approximately 20%. Additionally, intangible-related deferred taxes are expected to be $22.0 million per quarter in 2016.

Going forward, the company expects active U.S. equity outflows. Though the idiosyncratic items, which impacted the fourth-quarter 2015 results, will not be witnessed, the company anticipates reduced outflows at Third Avenue.

However, flows at U.S. Mutual Fund business are expected to remain strong with January recording an inflow of $830 million on the back of continued strength in the company’s alternatives in global equity funds combined with reduced outflows.

Also, the company projects improvement in retail flows along with good momentum in its institutional business going forward, given the strength of the affiliates' performance and addition of several high-quality new affiliates with in-demand product sets.

Notably, Affiliated Managers’ quarterly activities were inadequate to win analysts’ confidence. Hence, the Zacks Consensus Estimate for the quarter remained unchanged at $2.94 per share over the last 7 days.

Stocks That Warrant a Look

Affiliated Managers is not the only firm looking up this earnings season. We also anticipate earnings beat from the following finance companies:

Garrison Capital Inc. (NASDAQ:GARS) has an Earnings ESP of +6.25% and a Zacks Rank #3. It is scheduled to report on May 3.

Earnings ESP for Prudential Financial, Inc. (NYSE:PRU) is +0.42% and it has a Zacks Rank #2. The company is slated to report on May 4.

Walker & Dunlop, Inc. (NYSE:WD) has an Earnings ESP of +6.25% and a Zacks Rank #3. It is scheduled to report results on May 4.