Due to tighter lending standards and high interest rates, the economy is expected to enter a recession this year. Amid this backdrop, avoiding a fundamentally weak global asset management company, KKR & Co. Inc. (KKR), could be wise.
In this piece, I have discussed several reasons the stock could witness significant downside in the near term.
KKR’s EPS and revenue surpassed consensus estimates in the fourth quarter. Its EPS was 7.7% higher than analyst estimates, while its revenue beat the consensus estimate by 5.2%. However, the company’s total revenues for the quarter declined 37.6% year-over-year.
KKR’s Co-Chief Executive Officers, Joseph Y. Bae, and Scott C. Nuttall, said, “2022 was another productive year for KKR. On the back of strong investment performance, we had our second-best fundraising year ever, helping double our AUM over the last two years to $500 billion. We continue to innovate and diversify – with over 50% of capital raised last year in strategies that did not exist 5 years ago.”
“We feel incredibly well positioned for this environment with over $100 billion of dry powder ready to deploy. We have never been more confident in our team, our strategy, and our growth prospects,” they added.
In the fourth quarter, KKR’s asset management revenues fell 66.5% year-over-year to $693.49 million. Its total investment income – Asset Management declined 95.6% year-over-year to $5.35 million. KKR’s assets under management (AUM) rose 7% year-over-year to $504 billion. The company’s fee-related earnings (FRE) declined 8% year-over-year to $559 million.
Barclays has cut the price target of KKR from $66 to $63. On the other hand, Asset Management One Co. Ltd. trimmed its KKR holding by 4.6% in the fourth quarter. Over the past three months, the stock has declined 4.4% in price, while it has gained 14.3% year-to-date to close the last trading session at $53.07.
Here’s what could influence KKR’s performance in the upcoming months:
Disappointing Financials
KKR’s total revenues declined 37.6% year-over-year to $2.53 billion for the fourth quarter ended December 31, 2022. Its adjusted EBITDA declined 35% year-over-year to $1.12 billion. The company’s after-tax distributable earnings decreased 41.5% over the prior-year quarter to $821.82 million. Also, its net income – KKR common stockholders declined 83.6% year-over-year to $83.22 million.
For the fiscal year ended December 31, 2022, KKR’s total revenues declined 64.8% year-over-year to $5.72 billion for the fourth quarter ended December 31, 2022. Its adjusted EBITDA decreased 7.3% year-over-year to $4.56 billion.
The company’s after-tax distributable earnings decreased 11.8% over the prior-year period to $3.45 billion. Also, its net loss – KKR common stockholders came in at $910.13 million, compared to a net income – KKR common stockholders of $4.56 billion in the year-ago period.
Mixed Analyst Estimates
Analysts expect KKR’s EPS and revenue for fiscal 2023 to decline 2.9% and 4.2% year-over-year to $3.79 and $6.55 billion, respectively. Its EPS and revenue for fiscal 2024 are expected to increase 28.3% and 29.3% year-over-year to $4.86 and $8.46 billion, respectively.
Its EPS and revenue for the quarter ended March 31, 2023, are expected to decline 32.5% and 35.1% year-over-year to $0.74 and $1.23 billion, respectively.
Poor Profitability
KKR’s 1.54% trailing-12-month Capex/Sales is 18.6% lower than the 1.89% industry average. Likewise, its trailing-12-month net income margin is negative 15.20% compared to the 25.80% industry average. Furthermore, the stock’s negative 5.50% trailing-12-month Return on Common Equity compares to the industry average of 11.06%.
Stretched Valuation
In terms of forward Price/Sales, KKR’s 6.98x is 239.8% higher than the 2.05x industry average. Its 1.69x forward Price/Book is 79.2% higher than the 0.95x industry average. Likewise, its 14.02x forward non-GAAP P/E is 60% higher than the 8.76x industry average.
POWR Ratings Reflect Bleak Prospects
KKR has an overall D rating, equating to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. KKR has an F grade for Value, in sync with its stretched valuation. It has a D grade for Quality, consistent with its poor profitability.
KKR is ranked #33 out of 35 stocks in the F-rated Private Equity industry. Click here to access KKR’s Growth, Momentum, Stability, and Sentiment ratings.
Bottom Line
KKR ended fiscal 2022 on a disappointing note, as its revenue declined and it reported a loss. The possibility of a recession later this year can put further pressure on the profitability of the asset management company. During an uncertain macroeconomic environment, attractive investment opportunities might be hard to come by, making it difficult for the company to invest.
Given its disappointing financials, poor profitability, and stretched valuation, it could be wise to avoid the stock now.
Stocks to Consider Instead of KKR & Co. Inc. (KKR)
The odds of KKR outperforming in the weeks and months ahead are significantly compromised. However, there are many industry peers with impressive POWR Ratings. So, consider these three A-rated (Strong Buy) or B-rated (Buy) stocks from the Financial Services (Enterprise) industry instead:
Forrester Research, Inc. (FORR)
Everi Holdings Inc. (EVRI)
Intercorp Financial Services Inc. (IFS)
What To Do Next?
Get your hands on this special report with 3 low priced companies with tremendous upside potential even in today’s volatile markets:
3 Stocks to DOUBLE This Year >
KKR shares were trading at $53.33 per share on Monday afternoon, up $0.26 (+0.49%). Year-to-date, KKR has gained 15.19%, versus a 9.16% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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