Author Topic: HNNA - Hennessy Advisors  (Read 5198 times)

Tim Eriksen

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Re: HNNA - Hennessy Advisors
« Reply #10 on: January 27, 2017, 06:35:34 PM »
One other thing I like is that their AUM is posted daily so there are no declining AUM or revenue surprises.  For the last quarter my estimate of Management revenues was off by just $1,500 on a $12 million figure.  That doesn't happen at other companies.   To only have to "worry" about accurately projecting the expense side versus both revenue and expense is nice.   


rb

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Re: HNNA - Hennessy Advisors
« Reply #11 on: January 27, 2017, 08:48:29 PM »
I don't want to rain on the parade because I appreciate what Tim is doing here by posting his ideas.

There are a number of asset managers that are attractively priced. However I think that the industry is at a cyclical top. As markets top out. Fund outflows invariably follow. In this space I think I'd be looking at BEN. Much bigger and a little pricier but they have very good distribution.

I historically have liked BEN.  I once worked for them 20+ years ago.  I recently sold even though the valuation in terms of PE net of cash is low because of the higher fixed income exposure.  I think BEN needs to be more aggressive on its repurchase.
Tim, again appreciate where you're coming from and your initiative but someone decided to try and Make Canada Great Again! Lol all this greatness is too much. I may get sick of greatness.

CorpRaider

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Re: HNNA - Hennessy Advisors
« Reply #12 on: January 28, 2017, 06:36:30 PM »
This is the guy/shop who bought the mutual fund from O'Shaugnessy (from What Works on Wall Street), as mentioned a lot by Greenblatt (he doesn't drop the names).  He doesn't strike me as the brightest crayon whenever I catch an interview, but he was smart enough to buy that nice quant midcap value model and stick with it.  Wouldn't be surprised that fund underperformed over the last 5 or so.  If it hadn't, I would be looking for style drift.  I think I like IVZ better.  Scared that if you have no ETF exposure or you are a dinosaur walking the earth.
« Last Edit: January 28, 2017, 06:42:55 PM by CorpRaider »

Tim Eriksen

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Re: HNNA - Hennessy Advisors
« Reply #13 on: December 27, 2017, 10:26:19 AM »
In a market where value seem hard to find, I am a bit surprised how poorly this stock has performed in 2017.  It is down over 20% even though AUM has increased and the company will benefit greatly from tax reform.  The stock is trading at about $16.30 per share.  EPS prior to tax reform was expected to be about $2.10 in 2018.  Not many stocks trade at 8x.  With tax reform EPS jumps to $2.56 per share.  That is a P/E of under 6.4x.  As best I can tell it appears that tax reform will still allow for the amortization of their management contracts.  If so that adds another $0.22 to annual cash earnings.  They are rapidly paying down debt from prior acquisitions and tenders.  Net debt at the start of the year was $25 million.  At the end of 2017 it should be about $8 million.   Their latest acquisition was funds from Rainier for just 85 basis points, or 1x revenue.   

Schwab711

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Re: HNNA - Hennessy Advisors
« Reply #14 on: December 27, 2017, 12:53:32 PM »
In a market where value seem hard to find, I am a bit surprised how poorly this stock has performed in 2017.  It is down over 20% even though AUM has increased and the company will benefit greatly from tax reform.  The stock is trading at about $16.30 per share.  EPS prior to tax reform was expected to be about $2.10 in 2018.  Not many stocks trade at 8x.  With tax reform EPS jumps to $2.56 per share.  That is a P/E of under 6.4x.  As best I can tell it appears that tax reform will still allow for the amortization of their management contracts.  If so that adds another $0.22 to annual cash earnings.  They are rapidly paying down debt from prior acquisitions and tenders.  Net debt at the start of the year was $25 million.  At the end of 2017 it should be about $8 million.   Their latest acquisition was funds from Rainier for just 85 basis points, or 1x revenue.   

I've been trying to look at HNNA lately. Some of the things I don't like:
1. Considering the market returns in the past few years, HNNA has negative organic AUM flux. At 2% of AUM, I figure they will need to spend around 50% of FCF to maintain AUM, assuming flat markets and no change to past AUM flows. A downturn in the markets could hurt, but the tax plan certainly helps with that in the short-term.
2. I'm not sure the asset management industry will get much benefit from the corp tax rate change. There are essentially no barriers to entry and they are no longer limited by geography to the degree they used to be. I expect a large % of the tax cut to be competed away by some means (e.g. increased negative flow if fees stay unchanged).
3. Management increased share issuance to themselves as the stock has fallen, which makes me somewhat concerned that they will slowly transfer ownership of the company to themselves.
4. Assuming the trends mentioned in #1 hold true, I think ~$10m-$12m normalized FCF is closer to minority shareholder earnings power, with the new tax rate. Either way, my 1 standard deviation of expected FCF is a high % of expected normalized FCF. So even at 10x-11x FCF, the risk seems really high compared with some OTC banks trading at roughly the same valuations as HNNA (and much lower stnd devs, as one example of alternative investment options).

I'm interested if you agree/disagree with any of this and why

Tim Eriksen

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Re: HNNA - Hennessy Advisors
« Reply #15 on: December 27, 2017, 02:51:51 PM »
In a market where value seem hard to find, I am a bit surprised how poorly this stock has performed in 2017.  It is down over 20% even though AUM has increased and the company will benefit greatly from tax reform.  The stock is trading at about $16.30 per share.  EPS prior to tax reform was expected to be about $2.10 in 2018.  Not many stocks trade at 8x.  With tax reform EPS jumps to $2.56 per share.  That is a P/E of under 6.4x.  As best I can tell it appears that tax reform will still allow for the amortization of their management contracts.  If so that adds another $0.22 to annual cash earnings.  They are rapidly paying down debt from prior acquisitions and tenders.  Net debt at the start of the year was $25 million.  At the end of 2017 it should be about $8 million.   Their latest acquisition was funds from Rainier for just 85 basis points, or 1x revenue.   

I've been trying to look at HNNA lately. Some of the things I don't like:
1. Considering the market returns in the past few years, HNNA has negative organic AUM flux. At 2% of AUM, I figure they will need to spend around 50% of FCF to maintain AUM, assuming flat markets and no change to past AUM flows. A downturn in the markets could hurt, but the tax plan certainly helps with that in the short-term.
2. I'm not sure the asset management industry will get much benefit from the corp tax rate change. There are essentially no barriers to entry and they are no longer limited by geography to the degree they used to be. I expect a large % of the tax cut to be competed away by some means (e.g. increased negative flow if fees stay unchanged).
3. Management increased share issuance to themselves as the stock has fallen, which makes me somewhat concerned that they will slowly transfer ownership of the company to themselves.
4. Assuming the trends mentioned in #1 hold true, I think ~$10m-$12m normalized FCF is closer to minority shareholder earnings power, with the new tax rate. Either way, my 1 standard deviation of expected FCF is a high % of expected normalized FCF. So even at 10x-11x FCF, the risk seems really high compared with some OTC banks trading at roughly the same valuations as HNNA (and much lower stnd devs, as one example of alternative investment options).

I'm interested if you agree/disagree with any of this and why

1.I probably don't share as pessimistic view on the overall market.  I understand looking at it the way you do but I consider a flat AUM without the need to do additional acquisitions as most likely, a down side scenario of a 20% market correction, and even an upside of a fund catching fire or the market going higher (10 to 20% increase in AUM).  Outflows have always been a problem for HNNA except from 2013 to 2015 after the FBR acquisition when a few funds caught fire.
2. I don't expect tax reform to result in firms lowering their fees by ~20% in order to try and win additional assets.  Going from 80bps to 60bps is not the determining factor for actively managed funds. Past Performance is what draws in buyers.  Unlike banks they do not need to raise salaries.   
3. Since stock comp is based on dollars they would get more shares when the share price is lower and less when it is higher.  Is what it is.  I don't see management trying to take control since they participated in the tender offers on a pro rata share. 
4. I am not that pessimistic.  At current AUM levels they should have $23 million of annual FCF, I don't expect them to need to spend half to maintain AUM.  If they do need to, then the stock is just under fair value.  If they don't it is half of fair value.
I appreciate the thoughts.  It makes me think through potential scenarios.

valuedontlie

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Re: HNNA - Hennessy Advisors
« Reply #16 on: December 06, 2018, 06:11:05 PM »
Tim,

Any updated thoughts on this name? Down significantly again this year and looks interesting given the net cash position and lower tax rates... They  also made a small-ish acquisition after yearend which should add another $215m in AUM.

On the flip side... their website shows AUM (as of 12/4) at $5.6bn compared to $6.2bn as of 9/30 and $6.6bn average AUM for FY18... part of the trouble inherent in asset management businesses...