Ameriprise Financial Inc.


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Ameriprise Financial Inc.

  1. 1. Ameriprise Financial Inc. (AMP) Chih-Hao (Andre) Chen Date: February 22, 2008 Consensus Estimate 12/07A 12/08E 12/09E Sector: Financial EPS $4.03 $4.38 $4.97 Industry: General Finance P/E 13.25 12.12 10.67 Current Price: $52.45 Long Term Growth Rate: 9.83% 52 Wk Price Range: $45.65 - $69.25 Ratio Analysis Co. Indus. Sector SP500 Ave. Daily Vol: 1.04 Million P/E (TTM) 13.25 18.29 15.04 18.49 Beta: 1.71 P/S (TTM) 1.42 3.45 3.40 2.55 Market Cap ($million): 12.16 Billion P/B (MRQ) 1.55 3.27 2.04 3.81 Shares Out (million): 231.90 Million ROA (TTM) 0.009 6.23 3.52 8.88 Inst. Hold %: 79.44% EBO Valuation $49.77 Div Yld: 1.15% Recommendation: Hold Total Debt/Equity: 0.28 Stop-loss Price: $41.96 Member S&P 500? Yes Price 6-mo prob 12-mo prob Target Price 65.63 N/A N/A Investment Thesis Summary • Ameriprise Financial Inc. is America’s largest Fundamental Valuation: financial planning company Based on the Bearish: Using a discount rate of 13.10%, the number of financial plans annually disclosed in EBO valuation model yielded a current stock Form ADV. The company serves more than price of $49.77 which is 5.1% lower than the 2.8 million individual, business, and current stock price. institutional clients. • The estimates of earnings in FY 2008 and FY Relative Valuation: 2009 are steadily growing. According to the Neutral: There are three neutral indicators and estimates of analysts, $4.38 of EPS in FY 2008 two bearish indicators. The relative valuation will be 8.7% higher than $4.03 of EPS in FY suggests that Ameriprise probably is on the 2007. Estimated $4.97 of EPS in FY 2009 will value. be 23.3% higher than $4.03 of EPS in FY 2007. • Ameriprise Financial Inc. has strong Technical Analysis: operational system to support its clients and Bullish/Neutral/Bearish: There are two offer best financial plans. bullish, three neutral, and four bearish indicators • Higher Beta means higher risk in the market. for the technical analysis. This gives Ameriprise The Beta of Ameriprise is 1.71 which is relative uncertain trend in the future market. higher than the competitors in the financial industry, especially under this volatile market. Earnings Analysis: • The summary of valuation is neutral. Although Neutral: There are three positive earnings the total shares of institutional owners increase surprises in the past five quarters. The estimates by 35,870,040, the number of sellers is bigger of earnings show stable growth. However, there than the number of buyers. are all down revisions within last four weeks. • The EBO value yields a price is $49.77 that is 5.1% lower than the current market price. Analyst Recommendations: • Because of the economic situation and fear of Bullish/Neutral: Ameriprise’s rating has recession, people probably prefer to hold cash improved from 2.57 a year ago to 2.11. The current instead of investing their money. rating of 2.11 gives the stock a rating between “Hold” and “Outperform.” Institutional Ownership: Neutral: The total shares of institutional owners are increasing by 35,870,040. However, the total sellers are more than total buyers during the period. 1
  2. 2. Company Summary Ameriprise Financial, Inc. is engaged in providing financial planning, products and services that are designed to offer solutions for its clients' asset accumulation, income and protection needs. The Company has two mainly operating segments: Asset Accumulation and Income, and Protection. The Asset Accumulation and Income segment offers its own and other companies' mutual funds, as well as its own annuities and other asset accumulation, and income products and services to retail clients through its multi-platform financial advisor network. The Protection segment offers various life insurance, disability income and brokered insurance products1. When it comes to the revenue distribution, 74% of company’s revenues come from Asset Accumulation and Income business; 24% of company’s revenue was attributable to Protection business. The categories of revenue include: management, financial advice, and service fees, distribution fees, net investment income, and others2. Asset Accumulation and Income Segment The Company offers an array of asset accumulation and income products and services to help retail, business, and institutional clients address their identified financial objectives. It also offers a range of investment management products and services to retail and institutional clients outside the United States through Threadneedle Asset Management Holdings Limited. Those products include mutual funds, securities, annuities, IRAs, and managed products. The Company helps its customers to make appropriate financial plan according to customer’s different needs or thoughts. 74% of the Company’s revenues are coming from this segment. Protection The Company offers a variety of protection products, including life, disability income, brokered life and health insurance products and personal auto and home insurance, to address the identified protection and risk management needs of our retail clients. It offers these insurance products primarily to its clients with financial plans and, other than personal auto and home insurance, it offers these products through its branded advisors. 24% of the Company's revenues were attributable to our Protection business3. Table 1: Distribution of Asset Accumulation and Income, and Protection in 2005, 2006     Years Ended December 31, 2006 Percent Share Percent Share of 2006 2005 of Total Total Total Revenue Asset Accumulation and $5,928 73% $5,350 71% Income Protection $1,969 24% $1,948 26% Competition and Strategy 1 2 3 2
  3. 3. Ameriprise Financial, Inc. is America's largest financial planning company. In this competitive financial market, however, it has two director competitors to compete with Ameriprise Financial, Inc. They are Principal Financial Group, Inc. and American International Group Inc. Principal Financial Group, Inc. (PFG) is a provider of retirement savings, investment and insurance products and services with $256.9 billion in assets under management. PFG operates in three segments: U.S. Asset Management and Accumulation, International Asset Management and Accumulation, and Life and Health Insurance4. The Company's U.S. Asset Management and Accumulation segment consists of asset accumulation operations, which provide retirement savings and related investment products and services to businesses, their employees and other individuals, and Principal Global Investors, PFG's United States-based asset manager. Operating revenues of forth quarter in this segment increased to $1,300.3 million compared to $1,085.3 million for the same period in 2006. PFG's International Asset Management and Accumulation segment consists of Principal International, which has operations in Chile, Mexico, Hong Kong, Brazil, India, China and Malaysia. Through Principal International, PFG offers retirement products and services, annuities, long-term mutual funds, life insurance and institutional asset management. The operating revenues were huge increased to $255.4 million for forth quarter in 2007 compared to $128.6 million for the same period in 2006. The increase was the result of higher yields on invested assets and increased sales of single premium group annuities in Chile. The Company's Life and Health Insurance segment offers individual life insurance, group health insurance and specialty benefits, including group dental, group vision, group life, group long-term and short-term disability and individual disability insurance throughout the United States. This segment’s forth operating revenues were $1,221.6 million which is one percent increase from the same period in 20065. American International Group, Inc. (AIG) is a holding company which, through its subsidiaries, is engaged in a range of insurance and insurance-related activities in the United States and abroad. AIG's primary activities include both General Insurance and Life Insurance & Retirement Services operations. Other significant activities include Financial Services and Asset Management which are similar to Ameriprise Financial, Inc. The operational business units divided into four segments, including General Insurance Operations, Life Insurance & Retirement Services Operations, Financial Services Operations, and Asset Management Operations. Table 1 shows that the comparison of each segment in 2006 and 2007. According to the table 1, we can realize that the segments of general insurance and life insurance & retirement services account for more than 50% of total revenues6. Table 1: Three Month Nine Month Ended September 30 Ended September 30 2007 2006 2007 2006 (in millions) Revenues: General Insurance 12,75 $8 $ 12,615 $ 38,589 $ 36,438 Life Insurance & Retirement Services 12,63 2 12,542 40,337 37,303 Financial Services 2,785 3,011 7,109 5,923 Asset Management 1,824 993 5,721 3,647 Other 13 215 407 443 Consolidation and eliminations (176 ) (129 ) (532 ) (375 ) Consolidated 7 $ 29,83 $ 29,247 $ 91,631 $ 83,379 4 5 6 3
  4. 4. 6 Ameriprise Financial, Inc. has some subsidiaries, including RiverSource Life Insurance Company, Ameriprise Certificate Company, and Ameriprise Bank. Those subsidiaries are the key elements to help Ameriprise Financial offers financial services for customers. Also, Ameriprise specializes in meeting the retirement- related financial needs of the mass affluent and affluent which are important source of revenue. RiverSource Life Insurance Company basically offers products, such as insurance and annuity. The insurance products include life, disability income, brokered life and health insurance products and personal auto and home insurance. RiverSource Life Insurance Company offers these insurance products primarily to its clients with financial plans and, other than personal auto and home insurance8. Those products are playing the important roles in the segment of protection which has 24% of total revenues. Ameriprise Certificate Company issues four different types of face-amount certificates which are types of investment product. The purpose of those certificates is designed to meet different investment objectives. The five certificates are Ameriprise Flexible Savings Certificate, Ameriprise Stock Market Certificate, Ameriprise Market Strategy Certificate, and Ameriprise Installment Certificate. The first one, Ameriprise Flexible Savings Certificate is a fixed-rate investment with competitive returns that lets you choose a term from six months to three years. The second one, Ameriprise Stock Market Certificate offers interest tied to the potentially higher returns of the stock market, plus an interest rate guaranteed by Ameriprise Certificate Company. The third one, Ameriprise Market Strategy Certificate offers interest tied to the potentially higher returns of the stock market with the flexibility of having investors contributions invested systematically over a period of time. The final one, Ameriprise Installment Certificate offers base yields, plus a bonus for regular saving, which can give a substantial boost to your total return9. Ameriprise Bank offers a broad suite of products to meet clients' borrowing, cash management and personal trust needs. The bank will continue to develop new offerings that meet clients' ongoing planning needs. The first of these is the home lending program including mortgages, home equity loans and lines of credit. Those products offered primarily through its network of more than 10,000 Ameriprise financial advisors. Ameriprise Financial, Inc. not only offers management products and services in United State, the company also help clients invest international markets by Threadneedle Investments. Threadneedle Investments offers a range of asset management products and services, including segregated asset management, mutual funds and hedge funds, to institutional clients, as well as to retail clients through intermediaries, banks and fund platforms in international offices10. This platform will bring more diversification in client’s financial plan. According to the annual report of Ameriprise, its strategy includes growing mass affluent and affluent client base, strengthening its lead in financial planning and advice, delivering profitable growth, growing assets by continuing to enhance its mix of products and solutions, and ensuring an increasing strong and efficient operating platform. 7 8 9 10 4
  5. 5. Historical Revenue and Earnings: Historical Revenue (In Million) Historical Earnings FY 12/07 FY 12/06 FY 12/05 FY 12/07 FY 12/06 FY 12/05 1st Quarter $2,063 $1,949 $1,847 $0.69 $0.57 $0.74 2nd Quarter 2,182 2,053 1,895 0.83 0.57 0.63 3rd Quarter 2,202 1,977 1,873 0.84 0.71 0.51 4th Quarter 2,319 2,139 1,869 1.10 0.70 0.44 Total $8,766 $8,118 $7,484 $3.46 $2.55 $2.32 According to the table of historical revenue and earnings of Ameriprise, we can easily find that the revenue keeps growing from FY 2005 to FY 2007, and the earnings are also growing from FY 2005 to FY 2007. The revenue grew 8.47% from FY 2005 to FY 2006, and slightly increased 7.9% from FY 2006 to FY 2007. In the meantime, the earnings increased 9.9% in FY 2006 and 36% in FY 2007. In last three years, the growth rate of earnings was all higher than the growth rate of revenue. The higher earnings growth rate also means higher operating profits from company’s operation. During the forth quarter of FY 2007, the hosing and credit crisis bring the huge negative influence into the market environment, but Ameriprise can still keep its revenue and earnings growing. There are some reasons: Asset Management pretax income grew 40 percent, or $31 million, to $108 million, reflected in growth in higher yielding assets and proceeds from the 2006 sale of our defined contribution recordkeeping business. Protection pretax income increased 40 percent, or $44 million, to $154 million, and included a $19 million gain from the deconsolidation of a variable interest entity11. Even under this volatile market environment, Ameriprise still do its best to help clients balance their asset portfolio and keep growth. 11 5
  6. 6. I. Fundamental Valuation Ameriprise PARAMETERS FY1 FY2 Ltg EPS Forecasts 4.38 4.97 9.83% Model 1: 12-year forecasting horizon (T=12). Book value/share (last fye) 32.90 and a 7-year growth period. Discount Rate 13.10% Dividend Payout Ratio 17.34% Next Fsc Year end 2008 Current Fsc Mth (1 to 12) 2 Target ROE (industry avg.) 18.88% Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Long-term EPS Growth Rate (Ltg) 0.0983 0.0983 0.0983 0.0983 0.0983 Forecasted EPS 4.38 4.97 5.46 6.00 6.58 7.23 7.94 Beg. of year BV/Shr 32.900 36.521 40.629 45.141 50.096 55.539 61.517 Implied ROE 0.136 0.134 0.133 0.131 0.130 0.129 ROE (Beg. ROE, from EPS forecasts) 0.133 0.136 0.134 0.133 0.131 0.130 0.129 0.141 0.153 0.165 0.177 0.189 Abnormal ROE (ROE-r) 0.002 0.005 0.003 0.002 0.000 -0.001 -0.002 0.010 0.022 0.034 0.046 0.058 growth rate for B (1-k)*(ROEt-1) 0.000 0.110 0.112 0.111 0.110 0.109 0.108 0.107 0.117 0.126 0.136 0.146 Compounded growth 1.000 1.110 1.235 1.372 1.523 1.688 1.870 2.069 2.311 2.603 2.958 3.390 growth*AROE 0.002 0.006 0.004 0.002 0.001 -0.001 -0.004 0.021 0.051 0.088 0.136 0.196 required rate (r) 0.131 0.131 0.131 0.131 0.131 0.131 0.131 0.131 0.131 0.131 0.131 0.131 0.131 discount rate 1.131 1.279 1.447 1.636 1.851 2.093 2.367 2.677 3.028 3.425 3.873 4.381 div. payout rate (k) 0.173 Add to P/B PV(growth*AROE) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.01 0.02 0.03 0.04 0.04 Cum P/B 1.00 1.01 1.01 1.01 1.01 1.01 1.01 1.02 1.03 1.06 1.09 1.14 Add: Perpetuity beyond current yr (Assume this yr's AROE forever) 0.01 0.03 0.02 0.01 0.00 0.00 -0.01 0.06 0.13 0.20 0.27 0.34 Total P/B (P/B if we stop est. this period) 1.02 1.04 1.03 1.02 1.01 1.01 1.00 1.08 1.16 1.26 1.36 1.48 Implied price 34.17 34.96 34.66 34.37 34.08 33.80 33.54 36.17 39.05 42.23 45.77 49.77 Check: Beg. BV/Shr 32.90 36.52 40.63 45.14 50.10 55.54 61.52 68.08 76.02 85.63 97.31 111.53 Implied EPS 4.38 4.97 5.46 6.00 6.58 7.23 7.94 9.60 11.63 14.12 17.21 21.06 Implied EPS growth 0.135 0.098 0.098 0.098 0.098 0.098 0.209 0.211 0.214 0.219 0.224 Inputs: 1. EPS Forecasts are $4.38 in 2008 and $4.97 in 2009. Long-term growth rate (LTG) is 9.83%. Data are obtained from 2. Book value per share derived from Amperiprise Balance Sheet dated 12/31/2006. BVPS = Total Equity/Total Common Shares Outstanding. = 7925/241 = $32.88/share 3. Discount rate: Using CAPM formula, ra=rf + β*(E (rm)-rf), to get discount rate for Ameriprise. The risk free rate is based on Twenty year T-bond rate= 4.49%. The expected return on the market= 9.5%. Beta for Ameriprise is 1.72 from MSN. Thus, the discount rate for Ameriprise is 13.1% 4. Dividend payout ratio is 0.6/3.46= 17.34% as stated on Reuters. 5. Next fiscal year-end is 2008. 6. Current fiscal month is February, 2008 7. Target ROE= 18.88% as stated on Reuters. Output and Sensitivity Analysis: 1. Based on these parameters, a 12 year forecasting horizon and a 7 year growth period, the EBO valuation is $49.77 2. Changing the discount rate to 10%, the EBO valuation increase to $83.75 which is higher than the current price. Changing the discount rate to 12.8%, the EBO valuation is $52.14 which is close the current price. Thus, current rate of return is close to 12.8% 3. Changing the growth rate to 15%, the EBO valuation is $55.26 4. Changing the industry ROE 25%, the EBO valuation increase to $69.30 6
  7. 7. II. Relative Valuation Comparables Mean FY2 Earnings Estimate Forward Mean LT PEG P/B ROE Value Ticker Name Mkt Cap Current Price (next fiscal year) P/E Growth Rate (MRQ) 5 yr ave Ratio P/S 1 AIG American Inernational Group 120.70B 47.59 6.57 7.24 12.14% 0.60 1.17 13.02% 0.09 1.00 2 PFG Principal Financial Group 15.25B 58.86 4.22 13.95 11.69% 1.19 1.90 10.68% 0.18 1.35 AMP Amperiprise Financial, Inc 11.91B 52.29 4.38 11.94 9.83% 1.21 1.55 10.35% 0.15 1.42 Implied Price based on: P/E PEG P/B Value P/S 1 AIG American Inernational Group $31.73 $25.69 $39.47 $31.38 $36.82 2 PFG Principal Financial Group $61.09 $51.37 $64.10 $62.12 $49.71 High $61.09 $51.37 $64.10 $62.12 $49.71 Low $31.73 $25.69 $39.47 $31.38 $36.82 Median $46.41 $38.53 $51.78 $46.75 $43.27 Indicator Interpretation P/E Neutral: Ameriprise has the second lowest P/E ratio of its competitors. This could means that the price of Ameriprise is undervalued or more risky in the industry. The difference of P/E ratio between Amperiprise and industry is little which probably indicates Ameriprise is on the value. PEG (P/E/G) Bearish: Ameriprise has the highest PEG ration of the competitors. This indicates that the stock price of Ameriprise could be overvalued or less risky relative to its competitors. P/B Neutral: Ameriprise has the second highest P/B ratio compared to its competitors. The higher P/B ration means that company creates more value based on a given set of assets. This also could indicate that Ameriprise is riskier in the industry. Value (P/B/ROE) Neutral: The second highest value ratio suggest that Ameriprise probably is on the value or overvalued in the market. P/S Bearish: In general, companies with a PSR of less than .75 are often recommend, while market analysts often suggest that investors stay away from companies with Price to Sales ratio of 1.5 or greater12. Thus, Ameriprise has the highest P/S ratio means that the price of Ameriprise could be overvalued. Summary Overall, the relative valuation seems to be neutral for Ameriprise. Although Ameriprise has steady growth rate of EPS and total revenue, the PEG and P/S ratios indicate that the company probably is overvalued and not appropriate target for investors now. On the other hand, Ameriprise still can make steady revenue and growing EPS in recent years. Thus, I suggest that hold is best decision for Ameriprise. 12 7
  8. 8. III. Technical Analysis Chart 1: Bollinger Bands Slow Stochastics Chart 2: Exponential Moving Average (EMA) MACD 8
  9. 9. Chart 3: Linear Regression Momentum Briefly discuss each indicator in the following table. Indicator Interpretation Bollinger Bands Neutral: The stock price of Ameriprise is currently between the upper and lower bands. This indicates that the stock price is not going to fluctuate a lot. The band is not widening which means the development of stock price is stable. Stochastics Neutral: Although the %K line is above the %D line, the gap between two lines is decreasing recently. Thus, the trend of this chart maybe indicates bullish or bearish. Moving Averages Neutral/Bearish: The current price is below both the 25 day and 50 day moving averages which is a bearish sign for the stock price. However, the trend of both moving averages is presenting steady development which is neutral sign. MACD Bullish/Bearish: The MACD line is currently below zero which is bearish signal for the stock price. But the MACD line cross over BMA line and show the upward trend. Regression Bullish/Bearish: The current price is above the regression line which is bullish sign for the stock price. On the other hand, the regression line is showing downward trend which is bearish sign for the stock price. PriceROC Bearish: The current price is below 100 days ago. This indicates a bearish signal for the stock price. 9
  10. 10. IV. Earnings Analysis Earnings Surprises 12/2007 09/2007 06/2007 03/2007 12/2006 (Last qtr) (2 qtrs prior) (3 qtrs prior) (4 qtrs prior) (5 qtrs prior) Estimate $1.03 $1.00 $0.94 $0.90 $0.84 Actual $1.16 $0.99 $0.98 $0.90 $1.02 Difference $0.13 $-0.01 $0.04 $0 $0.18 Mean Earnings Estimates 03/2008 06/2008 12/2008 12/2009 LT Growth Rate Earnings $1.03 $1.06 $4.38 $4.97 9.83% # Estimates 7 7 9 9 6 Earnings Per Share Estimates Revisions Summary Last Week Last 4 Weeks Revised Up Revised Down Revised Up Revised Down Quarter ending 03/2008 0 0 0 5 Quarter ending 06/2008 0 0 0 5 Year ending 12/2008 0 0 0 7 Year ending 12/2009 0 0 0 5 Basically, Ameriprise has experienced positive earning surprise except the third quarter of 2007 with negative difference 0.01. The estimates of earnings in 2007 are continuous growing from $0.90 to $1.16. The earnings estimates of each quarter of 2008 are also steadily increasing. Those numbers can prove how Ameriprise keeps growing earnings under this volatile market. There is no earnings revision in last week. Within last four weeks, there are 5 down revisions for 1st quarter of 2008, 5 down revisions for 2nd quarter of 2008, 7 down revision for the ending of 2008, and 5 down revision for the ending of 2009. There is no up revision within last four weeks. This information could be considered as a bearish sign for the stock price. 10
  11. 11. V. Analysts’ Recommendations Current 1 Month Ago 2 Months Ago 1 Year Ago Buy 3 3 3 2 Outperform 2 1 2 4 Hold 4 5 5 7 Underperform 0 0 0 0 Sell 0 0 0 1 No Opinion 0 0 0 0 Mean Rating 2.11 2.22 2.20 2.57 Compared to one month ago, the number of outperform increased by one and the number of hold decreased by one. Besides, the mean rating dropped from 2.22 in the past month to 2.11 in the current month. The interpretation of both situations indicates a positive sign on the company’s stock. Thus, bullish is the result from analysts’ recommendation. 11
  12. 12. VI. Institutional Ownership   # of Holders % Beg. Holders Shares % Shares Shares Outstanding 227,991,782 100.00% Total Positions 529 81.64% 181,116,672 79.44%     New Positions 16 2.47% 1,674,506 0.73% Soldout Positions 100 15.43% -3,467,702 -1.52% Buyers 206 31.79% 16,588,116 7.28% Sellers 325 50.15% 19,281,924 8.46% Beg. Total Inst. Positions 648 100.00% 145,246,632 63.71%     #Buyers - #Sellers -119 38.79% 35,870,040 15.73% Ameriprise’s institutional ownership increased 15.73% which was from 63.71% to 79.44%. This is bullish indicator for the stock price. Many institutional owners of the stock believe that the company can maintain its growths of revenues and EPS. Although the difference of numbers of buyers and sellers is negative, the total shares were still increased 35,870,040. This indicates that buyers’ share numbers are larger than sellers’ share numbers. Thus, the institutional ownership analysis is bullish for the stock price. 12