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There was rightful outrage when Third Avenue's high-yield bond fund recently froze withdrawals, and the bad publicity has pushed shares of parent firm Affiliated Managers Group (AMG) way down.
Although Third Avenue is a relatively tiny part of Affiliated's business, AMG's shares -- which traded as high as $230.63 last spring -- fell to a nearly three-year intraday low of $141.68 on Monday. (Shares partly rebounded later in the session and into Tuesday.)
AMG fell even though the overall company has posted briliant numbers since the 2008 market crash. Earnings per share fell to $0.57 in 2008, but have rebounded every year since. And despite this year's less-than-stellar market action, analysts still expect AMG to ring up an all-time record of $9.60 in earnings per share on a GAAP basis.
Management actually views non-GAAP results as more representative of the company's performance, and many analysts agree. Yahoo! Finance reports that on a non-GAAP basis, consensus estimates call for the company to report $12.57 in EPS this year -- rising to $14.12 in 2016:
Thus, this week's stock-price drop is almost certainly an overreaction to the Third Avenue news, which should have almost no impact on AMG's results. After all, AMG is primarily an equity outfit, not a bond-fund house.
In fact, the stock's dramatic sell-off prompted Morningstar to upgrade AMG to a five-star stock rating (the highest ranking available). Shares are far and away at their best price-to-fair-value ratio since 2008.
Morningstar puts AMG's fair value at $215 a share, or almost 50% above current prices. This target appears quite achievable, as AMG has hit $217 or higher in each of the past three calendar years:
Value Line, which uses GAAP numbers throughout the data below, also sees good fundamentals for the stock:
As you can see, Monday's plunge left AMG's earnings multiple at just 15 given this year's expected profit levels. That represents a 43% discount to the stock's post-recession average P/E. It also offers much better value than AMG provided at any of its five best entry points over the past six years (denoted with green stars above).
As for AMG's financials, cash flow is strong, the balance sheet is solid and long-term prospects remain favorable.
True believers in this well-managed firm envision an eventual rebound to a 25x multiple of next year's earnings projections, as well as a price north of $250 a share within 12 to 18 months. That falls below the middle of Value Line's $210-to-$310 three-to-five-year price target for the stock.
My advice: Buy AMG shares or some June 17, 2016, call options on the stock.