Wednesday, September 9, 2009

Fortress Investment Group LLC (NYSE:FIG): Upgraded at Barclays

Barclays Capital is out with a note on brokers and asset managers this morning, expanding coverage and upgrading some ratings:

We prefer the alternative managers to the traditional asset managers within our asset management coverage subsector. Within our total coverage, we are favorably disposed towards asset managers, though our view on the traditional asset managers is clearly more neutral following a significant outperformance since the March lows versus the market and recent underperformance as investors grow skeptical of further market gains.

Among the alternative asset managers, we prefer FIG in the private equity camp and OZM in the hedge fund camp. We are upgrading our recommendations for BX (to 2-EW from 3-UW), FIG (to 1-OW from 2-EW) and OZM (to 1-OW from 2-EW). We prefer FIG to BX because of a significant valuation discrepancy between the two, despite BX being the highest quality name in our view. That said, our DCF valuation analysis suggests greater longer-term potential upside versus our P/E-based price target methodology for BX than FIG. With respect to the hedge funds, we prefer OZM to GLG given a cleaner earnings story over the next couple of years, a better track record through the downturn and likely stronger client relationships as a result of not having thrown down gates during the redemption cycle. That said, similar to BX, a DCF analysis shows greater potential upside for GLG versus our price target, which makes sense, since 2010 earnings for GLG are still impacted by high-water marks, and thus the DCF captures the added incentive fees that will come from the firm getting back above those marks in 2011. OZM, meanwhile, is already free of those headwinds going into next year due to only having one-year high-water marks.

BX trades at a significant premium to FIG, we believe, because it operates a larger, more diversified platform with a longer-term track record. Its hedge fund business is a relative outperformer with a fund of funds business that has really set itself apart from peers, in our view, while FIG’s macro hedge fund platform saw substantial underperformance last year. BX’s private equity portfolio, which under pressure from reduced equity valuations, is less visible than FIG’s, owing to a large portion of FIG’s portfolio being in companies that have since gone public whose stock prices are off meaningfully. Further, FIG has a greater concentration of investments in companies with income-producing assets that rely on securitization markets to finance their growth, and as such, have been among the hardest hit. That said, FIG’s portfolio companies are performing fundamentally pretty well, and very little debt is coming due of any size over the next couple of years. We believe that ultimately investor confidence around FIG’s ability to realize long term value from its investments will increase, driving a narrowing of the multiples between FIG and BX. Furthermore, FIG has been raising money for distressed credit investment, particularly around real estate, an area right within the wheelhouse of the founding partners. As 2Q earnings demonstrating, these investments are already starting to generate returns as was evidenced by performance fees recognized during the quarter. Lastly, BX still has ongoing headwinds in its commercial real estate business from writedowns of property values even as it is starting to mark up its corporate private equity investments again which could be an overhang relative to FIG. To be sure, though, BX is blue chip name within the alternatives space, and a company that we expect to drive substantial long term value.

Action: While this note is overview of the whole sector, I tried to highlights the parts concerning FIG because I think it is the most interesting in trading perspective. To get a full picture one should read the whole note.

Alternative asset managers have been on a tear lately, just take a look at charts of KFN, BX and also FIG. Barclays adds some fuel to the fire with the $9 price tgt - almost 100% upside from current levels.

I expect FIG to be strong all day, going as high as $5. So it should be considered as buy below $4.75 level.

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