Carlyle vs. Blackstone

 | Jun 14, 2013 | 5:00 PM EDT  | Comments
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According to a Form 4 filed with the SEC, the chief operating officer of private-equity firm The Carlyle Group (CG), Glenn Youngkin, directly purchased 150,000 shares of stock on June 10 at an average price of $26.88 per share.

Insider purchases are often useful events to track, because studies show that on average stocks bought by insiders narrowly outperform the market. We think that this is because insiders have to be fairly confident in the company in order to buy the stock and thus reduce their diversification. As of this writing, Carlyle is valued at $26.20 per share or a slight discount to where Youngkin bought (though broader market indices fell in the intervening period). The stock is up 18% from its levels shortly after its May 2012 IPO, essentially in line with the performance of the S&P 500.

Total revenue for Carlyle increased slightly in the first quarter of 2013 vs. a year earlier, but a surge in various forms of compensation caused net income for the quarter to fall to about $430 million. For example, over half of the private-equity firm's revenue comes from its performance fees, but much of this revenue is paid right back out as compensation to Carlyle's employees. Interestingly, the reverse was the case in terms of cash flow from operations, which came in much higher for this year's first quarter.

Wall Street analysts predict that Carlyle's adjusted EPS will increase to $3.13 over the course of this year; we'd note that the unadjusted numbers from last quarter track below that level. The consensus figure implies a current-year P/E multiple of only 8, however, and so we suppose that there is some room for the company to underperform expectations and still be a good value. The sell-side then expects EPS to increase a little bit more in 2014, with no change in the earnings multiple on a forward basis as a result. Certainly, the stock would qualify for value status if Carlyle was able to reproduce its first-quarter results for the rest of this year or even improve on them, and it's possible that its decline in earnings was a one-time adjustment.

Carlyle's closest peer is fellow private-equity group Blackstone (BX). Blackstone has done very well over the last year, with its stock price rising by 70%. That has been coupled with what, at least last quarter, were impressive growth rates on both top and bottom lines compared to the same period a year ago. The firm also deserves mention for its fairly high dividend payments in the last two quarters: $0.30 per share and $0.42 per share before that. Of course, before that payment, the quarterly payments had generally been about $0.10 per share for some time, so while the annual yield going off the most recent quarter may be fairly attractive (at 5.5%), the volatility in its payments may make Blackstone too risky for many income investors. The forward P/E here is also 8.

While this is a quite large insider purchase, and it may be worth monitoring Carlyle to see how its next quarter turns out, we actually think that Blackstone looks like at least as interesting a prospect. In terms of forward earnings estimates, the two companies are priced about evenly, and we see no reason why analysts would be more rosy-eyed about Blackstone. The company's recent performance seems less questionable to us, and while we've mentioned that the dividend yield probably isn't dependable enough to serve as the only reason for buying the stock, it is still a plus in our eyes. It's also possible that the insider purchase was motivated by factors that might benefit the private-equity industry in general rather than Carlyle in particular. Overall, we would say that Blackstone is more worthy of further research as a potential value play.

-- Written by Matt Doiron

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