Investors Should Bond With Nuveen
04/17/2007 12:00 am EST
Jon Markman, editor of Jon Markman’s Strategic Advantage, says municipal-bond specialist Nuveen is a strong performer that’s quietly branching out into some promising new businesses.
Originally founded as a municipal bonds broker way back in 1898, Nuveen Investments (NYSE: JNC) knows a thing or two about prudent investing. After all, “munis” are one of the safest investment vehicles out there, and Nuveen continues to specialize in them.
JNC currently does a lot of its business in retail-managed accounts and closed-end funds, as well as managing a ton of hedge-fund money. Total assets under management right now total $161 billion. It has shown great consistency over the years—producing capital gains for investors in nine of the past 10 years.
But after missing fourth-quarter earnings expectations by a penny back in January, Nuveen has seen its shares slide into some solid support. But the real reason that shares sold off this time around was because margins moved lower as revenue growth slowed. Operating margins came in at 43%, down from nearly 49% last year, while organic revenue growth dropped to 5% from its previous double-digit territory.
But JNC is beginning to increasingly focus on mutual funds, which generate higher management fees, in place of closed-end funds and retail-managed accounts. Net mutual fund inflows for the quarter nearly doubled year over year and totaled just over $1 billion. This was driven by the seven new open-end mutual funds that the company started in 2006, with another four or five expected this year.
As mutual funds become a larger percentage of Nuveen’s total business, margins should recover because higher management fees and new revenue will offset these expenses. According to analysts at Keefe, Bruyette & Woods, this should increase Nuveen’s average advisory fee to 47 basis points this year. (Mutual funds normally carry fees over 50 basis points, while managed accounts pull in closer to 43 basis points.) I expect this trend to continue, as higher fee products become a larger portion of total assets under management.
Nuveen also is growing the amount of assets invested internationally to $40 billion, or 25% of all assets, up from just $9 billion in 2005. This will provide another boost to JNC’s average advisory fee, since globally managed assets charge a higher fee. Moreover, as baby boomers finally begin to retire, they will reallocate their investments to favor conservative and stable fixed-income products, which are still Nuveen’s specialty.
The company will report first-quarter results this week, which I think could surprise to the up side as many analysts have lowered their expectations after the previous quarter’s results. A conservative 19x my 2008 earnings per share forecast of $3.14 gives us a 12-month price target of $60. That’s a 20% move from [its current price just under $50] and compelling enough for even the most risk-averse [investors].