Cohen & Steers Earnings: Interest-Rate Headwinds Continue To Affect Flows and Market Gains
There was little in narrow-moat Cohen & Steers’ CNS second-quarter results that would alter our long-term view of the firm. We are leaving our $70 per share fair value estimate in place. We view the shares as only being slightly undervalued right now.
Cohen & Steers closed out the June quarter with $80.4 billion in total assets under management, up 0.6% sequentially but still down 8.5% on a year-over-year basis. Net outflows (exclusive of distributions) of just over $1.0 billion since the start of the year were indicative of organic AUM growth of negative 2.5%, well off the positive 5.8% CAGR for organic AUM growth that the firm generated during 2018-22. That said, net flows did turn positive during the month of June and could be far less negative during the remainder of the year, as it seems that the Federal Reserve is winding down its path of rate hikes, which should improve the outlook for REIT securities in the near to medium term.
With average AUM down 16.5% year over year, second-quarter revenue declined 18.2% when compared with the prior year’s period. First-half revenue was also down 18.2% when compared with 2022 levels. We continue to expect revenue to decline at a 10%-15% rate this year, as Cohen & Steers should post better top-line results in the back half of the year as it laps more difficult 2022 results in the third and fourth quarters. Our five-year forecast (which includes an equity market correction midway through our projection period) has revenue growing at a low-single-digit rate on average annually.
As for profitability, the company’s adjusted GAAP operating margins of 37.3% during the first half of 2023 were 675 basis points lower than 2022 results, reflecting the negative side to the operating leverage in the asset manager’s business model. Even so, we are projecting Cohen & Steers’ profitability to recover over the next five years, with adjusted GAAP operating margins in a 39%-43% range, compared with 41.5% on average during 2018-22.
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