Tuesday, November 22, 2011

Janus Is Cheap

Janus Capital (JNS) manages and sells mutual funds to both retail and institutional investors. The management and performance fees these funds generate become Janus' revenues, and these revenues have provided the company with a steady stream of cash flow over the years (as seen over at frankvoisin.com).

Janus has generated free cash flow of almost $250 million per year over the last decade, and there have been some bad years for the investment industry within that period (e.g. the tech crash, and the recession of 2008 and 2009). Despite this, Janus has a market cap of just $1.2 billion and has more cash than it has debt.

The problems causing Janus' stock price to drop appear to be temporary. First, Janus fell with the rest of the market, as correlations increased as macroeconomic issues appeared to take center stage.

But Janus generates fees for assets under management and performance. Therefore a drop in the stock market translates directly into lower revenues. But even in this environment, Janus still generated free cash flow of about $45 million in the 3rd quarter; annualized, this still translates into a yield of 15% under pretty poor market conditions!

Finally, Janus is also suffering some outflows as a result of poor short-term relative performance in some of its equity funds. Investors flock to the funds with the most impressive recent returns. But just as quickly as a fund (or group of funds) can underperform, it can outperform. Furthermore, Janus offers a range of funds, giving it the ability to grow the successful ones and shutdown the ones with poor market appeal. As such, these outflows due to under-performance are likely to be only temporary.

There is no question that the mutual fund industry has come under attack. Though mutual funds tend to underperform the market, and are more expensive than their ETF cousins, there is no question that there is a market demand for them from certain investor groups. Janus is a profitable company that allows investors to buy into this industry at what appears to be a very attractive price.

Disclosure: Author has a long position in shares of JNS


Saidal said...

JNS was put on my radar when it was dropped from the SP 500... so that means a lot of forced selling from index funds. Besides the large FCF yield you mentioned, your also buying into three solid mutual fund offerings.

Using the Marty Whitman valuation for asset managers (2% AUM + tangible assets, I used cash and investments-debt) I came up with a range of $13-$15 per share.. Using a lower AUM of around $90-$100 billion I got a per share price around $11-$12. I'm hoping they continue the build out of their sales team and fixed income offerings.

J Mako said...

What do you think of this recent article by Alice Schroeder:


Saj Karsan said...

Hi J,

Yeah I discussed that article here.

I agree with some elements but not others. What about you?

J Mako said...

I don't have much insight. I'm sitting on the sideline at the moment.

p.s. I'm spending more time thinking about what the recent collapse of BDI means.

adib motiwala said...

HI Saj,

I also spent some time considering JNS as an investment. I think in hindsight the price was cheap enough where the risk reward was favorable. However, the problems at JNS are not short term in nature.
- check the outflows from funds for 12 quaters almost.
- check the performance of the main 4-5 funds which make up bulk of the AUM. (Bond funds are at 10% of aum. JNS is primarily an equity shop)
- So neither performance nor outflows have improved.

- I think its a good time to exit the investment as the margin of safety is gone. As can be seen from 2 quarters results, the forward valuation is not so cheap.