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James Connolly

AB AT A GLANCE

P/E ► 3.39 VERY LOW EV/EBITDA ► 2.95 LOW ROA ► 45.5% VERY HIGH ROE ► 44.2% VERY HIGH Debt to Equity ► 0.000790 VERY LOW Interest Coverage Ratio ► 36.0 HIGH

 

 

 

 

 

 

AllianceBernstein L.P. (NYSE: AB) is an asset management firm with over $800 billion in assets under management (AUM). Over 97% of AB's investments are in stocks and bonds.

The world's second largest insurance company AXA (headquartered in France) owns over 60% stake of AB.^[1] The company's foreign ownership lets it avoid the 35% federal corporate tax, and instead pay minimal dues of 7.5% for an unincorpated business.^[2] However, AB's partnership status also means that it must distribute nearly all of its earnings to its fund holders, limiting the growth potential of the firm.

More than half of AB's AUM is invested abroad, and the international focus of the company helped to shield the company from the 2007 credit crunch. Without the global assets under management increase of 27% over FY2007^[3] AB's balance books would have have looked a lot grimmer with the more than $60 billion in investment losses.^[1]

Corporate Overview

2007 AB AUM by Distribution Channel ($ in billions)^[4]

2007 AB Revenue by Sector ($ in millions)^[4]

AllianceBernstein's revenue, operating income, margins, and AUM reached all-time highs in 2007. AUM grew by 12% over FY2007^[5] through new investments and market appreciation.

However, AB's results from the 1Q2008 interrupted the firm's recent (2003-2007) momentum. Assets under management dropped to $735 billion--an 8% skid--largely due to $64 billion in investment losses mainly in its equity investments.^[6] Also, AB outflows in the private client services negated institutional inflows^[7] as AllianceBernstein bore the full blow from its investment losses. Moreover, annualized total revenue tumbled about 9% and AB's operating margin slipped by nearly 4% to 26.5% as compared to F2008.^[8]

AllianceBernstein's AUM investment channels include:

• Value Equity (48% of AUM) investments target undervalued equity opportunities for shorter-term gains. AB's Value Equity segment has averaged growth 17% since 2006, bolstered by Global Value Equity AUM growth of 47% and 34% in 2006 and 2007 respectively.^[9]

• Growth Equity (25% of AUM) investments include more established stocks with upward growth potential. This segment's AUM expanded by 38% and 24% in F2007 and F2006, again catapulted by global investment increases of nearly 50% and 30% respectively.^[9]

• Fixed-Income (25% of AUM) investments specialize in bonds. Fiscal 2007 saw 19% growth in this AB sector, along with 107% global fixed-income growth.^[9]

• Index/Structured (2% of AUM) investments include a variety of alternative investments, such as their hedge fund and venture capital subsidiaries. This category also includes AB's passive management or index investing channel, which refers to mutual and exchange-traded funds (ETFs) whose investments attempt to mirror market indices.^[10] This segment contracted over F2007, falling by $7 billion (23%) due to the large investment losses.^[9]

Also, AB's AUM and revenue fall under the following categories:

• Institutional Investment Services (63% of AUM & 31% of Revenue) refer to products and services provided for corporate or governmental investors using diversified investments into instruments like hedge funds, mutual funds, and investment trusts.

• Retail Services (23% of AUM & 32% of Revenue) are designed for the individual investor as their funds are spread among a variety of investment vehicles like those of AB's Institutional Investment Services. Such vehicles include mutual funds and closed end funds, which offer a set number of shares for its funds.

• Private Client Services (14% of AUM & 20% of Revenue) include AB's investment interactions with private clients.

• Institutional Research Services (9% of Revenue) entail AB's independent research, advising, and other investment services performed for its corporate clients.

• Other (7% of Revenue) AllianceBernstein also earns revenue from dividend and interest income, their investment gains (losses), and shareholder fees.

In the longer-term, AB's AUM, revenues, and operating incomes have all increased every year since 2003. In fact, AllianceBernstein's assets under management have grown annually by 10% on average since 2000.^[11]. However, over that same period, revenues were a bit more volatile. Bull markets one year and an investing scandal another generated revenue swings of up to 41% between years.^[11] The 2003 AB market scandal involved allegations of illegal market-timing, which refers to trading securities based on future price predictions. Though market-timing is not illegal, AB allowed priority investors many more trades per day than the average client, thereby using a double-standard. In the end, AB conceded $250 million in legal fees in order to settle the lawsuit.^[12]

AB Revenues and Operating Profits^[13]

Key Trends and Forces

Corporate tax code restructuring adds to AB expenses

As a foreign-owned partnership, AllianceBernstein is in a unique tax situation. As of FY2007, AB pays no federal or state corporate taxes. Instead, the company is subject to 3.5% federal tax on gross earnings as well as a 4.0% unincorporated business tax.^[2] The fact that AB is a partnership means that the firm must distribute nearly all its income to its fund investors.^[14] Though a corporation can keep some of its income as corporate profits, this money is also taxable. Should AllianceBernstein decide to incorporate the firm, it would then be subject to corporate taxes that amount to 35% for its income bracket.^[15] Though the firm is shielded from substantial U.S. taxes, as AB expands with subsidiaries around the world, effective taxes expand along with revenues.

Strong international exposure boosts AB business

AllianceBernstein is still largely an American firm, as 60% of its clients live in the U.S.^[3] However, both individual and institutional business are becoming more and more international. In fact, the company invested 40% ($320 billion)^[16] of their AUM overseas and 61% of their investment services ($489 billion)^[3] were for clients (mainly institutional) outside the US. International markets are providing key business for AB, especially as the firm pushes through the 2007 credit crunch. Without the global assets under management increase of 27% over FY2007^[3] AB's balance books would have have looked a lot grimmer with the more than $60 billion in investment losses.

Competition

AllianceBernstein competes with many firms throughout the greater financial services industry. Below is a table of relevant operating metrics of AB and its major competitors within the asset management industry. Note that for having the third largest AUM, AB has the second largest net income, which may be the result of its unique tax scenario. Moreover, AllianceBernstein has the largest average returns on equity within the trailing twelve months (TTM).

*5 yr. returns

References

1. ↑ ^{1.0 1.1} AB 2007 10-K pg. 18  
2. ↑ ^{2.0 2.1} AB 2007 10-K pg. 24  
3. ↑ ^{3.0 3.1 3.2 3.3} AB 2007 10-K pg. 3-4  
4. ↑ ^{4.0 4.1} AB 2007 10-K pg. 7  
5. ↑ AB 2007 10-K pg. 32  
6. ↑ Morningstar Reports
7. ↑ Reuters: AB January 2008 Report
8. ↑ AB FactSheet 1Q2008
9. ↑ ^{9.0 9.1 9.2 9.3} AB 2007 10-K pg. 13  
10. ↑ Investopedia: Passive Management
11. ↑ ^{11.0 11.1} [Morningstar Report]
12. ↑ SEC announces AB penalty
13. ↑ AB 2007 10-K pg. 31  
14. ↑ AllianceBernstein L.P.: Managing for Yield
15. ↑ AB: Tax Information
16. ↑ 2008 AB Conference Call
17. ↑ Statistics from Company 10-Ks and Annual Reports