KKR: A 5-Star Buy

11/07/2014 8:00 am EST

Focus: STOCKS

Kenneth Leon

Global Director of Industry & Equity Research, CFRA Research

Our latest Focus stock is a leading global investment firm which carries S&P Capital IQ’s highest investment recommendation of 5-Stars or “strong buy,” explains S&P Capital IQ equity analyst Ken Leon in S&P The Outlook.

KKR & Company (KKR) had $98 billion in assets under management as of June 30, 2014.

In our view, throughout its history, the firm has consistently been a leader in the private equity industry, having completed more than 200 private equity investments with a total transaction value in excess of $500 billion.

In recent years, KKR’s strategy has been focused on expanding its geographical presence and building businesses in new areas, such as fixed income, equity strategies, hedge fund solutions, capital markets, infrastructure, natural resources, and real estate.

We believe these new efforts build on its core principles and industry expertise, allowing the firm to leverage the intellectual capital and synergies in its businesses, and to capitalize on a broader range of opportunities.

The firm’s success has been driven by what we view as its strong track record of providing consistent returns to institutional investors, including pension funds, academic and non-profit institutions, governments, and other clients.

Headwinds during the 2008 financial crisis have shifted to tailwinds, in our opinion, for KKR’s private equity funds. KKR’s current dividend yield is 8.8%, which we believe is supported by cash flow and proceeds from investments divested.

Our $26 target price is based on a forward P/E multiple of 9.9 times our 2015 EPS estimate of $2.62, near the high end of the historical range and near peers.

Risks to our recommendation and target price are tied to the business cycle in the many industries in which KKR invests, as well as global macroeconomic and geopolitical risks. Efforts have been made to simplify the reporting of KKR’s results, but this is a complex company that we think has transparency risks.

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