AllianceBernstein: Classic Value

03/24/2014 8:00 am EST

Focus: STOCKS

Roy Ward

Chief Analyst, Cabot Benjamin Graham Value Investor

This featured recommendation is a classic value stock; the company is a leading global investment management firm structured as a master limited partnership, explains J. Royden Ward, editor of Cabot Benjamin Graham Value Investor.

AllianceBernstein Holding LP (AB) offers high quality research and diversified investment services to institutional investors and private clients in major global markets. The company is one of the largest US investment advisors, with assets under management totaling $445 billion, as of January 31.

AllianceBernstein significantly increased its size with the October 2000 acquisition of Sanford Bernstein, a leading US-based, value-oriented investment manager, for $3.5 billion in cash and stock.

France-based AXA owns 64% of AllianceBernstein LP. One-third of AB's assets under management belong to clients domiciled outside the US.

AB's Institutional Services actively manage stock and bond accounts for institutions, mutual funds, including Alliance Mutual Funds, and investments for well-heeled clients. The company's Retail Services unit offers investment management to other individual investors.

AB has begun a major turnaround. The company produced weak sales and earnings from 2008 through mid-2012, caused by poor investment advice to its debt and equity institutional clients.

During the past 12 months, though, the company's investment advice to clients has been among the best in the industry. AB's new success has attracted many new clients seeking market-beating returns in the debt and equity markets.

Sales advanced 7% and EPS rebounded 39% during the 12 months ended December 31, 2013. Lower costs and higher performance fees helped earnings to surge.

The company's turnaround should strengthen during the next 12 months. My forecast includes a revenue increase of 8% and an EPS advance of 18% to 2.12.

AB's dividend, which is directly correlated to profits, is now 29% higher than a year ago and provides a very high yield of 8.4%. Dividend payments should climb further during the next 12 months.

At 13.3 times latest EPS, and with a huge dividend yield, AB shares are clearly undervalued. I expect AB to reach my minimum sell price target of $33.40 within two years.

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