Perpetual and IOOF price guides cut
Recommendation
At Intelligent Investor our focus is on the gap between price and value and we try not to let movements in the former influence our thinking on the latter. The value of some stocks, though, is directly influenced by what's happening in the wider market, and fund managers are foremost amongst them.
Given that we don't try to predict short-term market movements, the only way you can really value a fund manager is to take its current funds under management (FUM), estimate a rate of growth, based on likely long-term 'market' growth and some assumptions about fund inflows and outflows, and give yourself a decent margin of safety.
FUM at Perpetual, for example, are likely to be 9% lower than the company reported for 30 June, prompting our upgrade to Buy on 15 Jul 15 (Buy – $45.86). And there's a good chance that fund flows – already looking somewhat rocky – will take a dive at least in the short term, thereby necessitating a wider margin of safety. We'll update on Perpetual following its final result, due on Thursday, but in the meantime we're going to downgrade our price guide to Buy below $42 and Sell above $60. The stock is down 19% since 15 Jul, BUY.
IOOF has less exposure to market movements because equities only account for slightly more than half its funds under administration and advice (compared to almost four-fifths of Perpetual's funds under management). But we're going to take the prudent course of knocking its Buy price down to $9 and its Sell price down to $14 (again, we'll review this following the final result due on Friday). The stock is down 7% since Media storm hits IOOF on 22 Jun 15 (Buy – $9.17). BUY.
We only updated on Platinum Asset Management yesterday, so much of the recent market move was incorporated in its price guide, which was probably slightly on the mean side in any case, so we're not going to make any change. HOLD.
Our price guide for Magellan Financial Group also already includes a pretty (un?)generous margin of safety, so we're happy not to make any changes. The stock is down 10% since Is Magellan's growth slowing on 25 May 15 (Hold – $18.78). HOLD.
Note: Our Growth and Income portfolios own shares in Perpetual and IOOF.