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10/20/14 10:31:35 AM
FOCUS STOCK OF THE WEEK

KOHLBERG KRAVIS ROBERTS & CO. L.P. (KKR)

KOHLBERG KRAVIS ROBERTS & CO. L.P. : (KKR)



This week's Focus Stock of the Week is Kohlberg Kravis Robert (KKR, $20.48), which carries S&P Capital IQ's highest investment ranking of 5-STARS, or Strong Buy. KKR is a leading global investment firm with $98 billion in assets under management as of June 30, 2014. In our view, throughout its history, the firm has consistently been a leader in the private equity industry, having completed more than 200 private equity investments with a total transaction value in excess of $500 billion.



In recent years, KKR's strategy has been focused on expanding its geographical presence and building businesses in new areas, such as fixed income, equity strategies, hedge fund solutions, capital markets, infrastructure, natural resources, and real estate. We believe these new efforts build on its core principles and industry expertise, allowing the firm to leverage the intellectual capital and synergies in its businesses, and to capitalize on a broader range of opportunities. Additionally, KKR has increased its focus on servicing existing fund investors and has increased its focus on developing relationships with new investors in the firm's funds.



We see positive funds available to support new investments and cash returns to its shareholders. The firm's success has been driven by what we view as its strong track record of providing consistent returns to institutional investors such as pension funds, academic and non-profit institutions, governments, and other clients. Fundraising is dependent on successfully making fund distributions to its limited partners. When exiting investments, KKR's objective is to structure the exit in a manner that optimizes returns for fund investors and, in the case of publicly traded companies, minimizes the impact that the exit has on the trading price of the company's securities.



Our $26 target price is based on a forward P/E multiple of 9.9X our 2015 EPS estimate of $2.62, near the high end of the historical range and near peers. Headwinds during the 2008 financial crisis have shifted to tailwinds, in our opinion, for KKR's private equity funds. KKR's current dividend yield is 8.8%, which we believe is supported by cash flow and proceeds from investments divested.



Following revenue growth of 24% in 2013, we see a 19.5% increase in 2014, followed by a low-single digit rise in 2015. Revenues are dependent on management fees on invested funds, and performance fees expected on the realization of investments either through a sale to a private third party or an initial public offering. KKR investments span a wide range of industries and geographies.



We think KKR is well recognized for managing new fundraising for private investments, as well as the timing of disposing of invested assets. In 2013, total fee revenues represented 24% of total segment revenues, the gross carried interest on the fund (49%) and investment income (27%), including realized and unrealized carried interest income. We see carried interest declining in 2014 with divestments.



We estimate economic income per share of $2.55 in 2014 and $2.62 in 2015, following $2.99 in 2013. Forecasting investment income remains challenging, in our view. KKR reports earnings on an economic net income after tax per adjusted unit basis, which looks at the business as if the KKR partnership units are entirely exchanged for common units.



Risks to our recommendation and target price are tied to the business cycle in the many industries in which KKR invests, as well as global macroeconomic and geopolitical risks. Efforts have been made to simplify the reporting of KKR's results, but this is a complex company that we think has transparency risks.



S&P Capital IQ's views on stocks are constantly re-evaluated. Please refer to our most recent publication on this stock to see our current view.



 

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