In summary the article talks about difficult financing conditions, and talks about write downs on FGIC, Freescale semiconductor and possibly Hilton hotels, the article mention that management may have to reimburse some incentive fees if funds don’t perform as expected, in addition it the article 40% increase in assets to over 103 billion in 2007 provide no protection to the company, and that the only hope for BX is for the economy to pick up strength. The article does mention however that some bulls argue the shares will cross $30 in a year based on their expected 2008 earnings and high dividend yield.
I believe Barrons article which is mainly negative sums up what is ailing BX shares, I believe in June 2007 Barrons was correct in their bashing of BX at $35, the stock looked expensive in light of rising interest rates and rising competition, here are 2 paragraphs from Barrons June 2007 article:
“By almost any financial yardstick, Blackstone looks richly valued relative to other asset managers, especially at a time when rising interest rates and burgeoning competition threaten to make the buyout business tougher.”
“A rising stock market has made compelling takeover targets scarcer for both private and corporate buyers, even as more rivals, including Kohlberg Kravis Roberts, Bain Capital and Goldman Sachs, crowd the field and eye the same ripe targets. Higher rates and more conservative lending standards likewise threaten to make life more expensive for borrowers and deal-doers of all stripes.”
The irony today is that 4 key components to why the company was considered expensive in June 2007 have gone away:
- Interest rates have gone down substantially, and expected to go down further.
- Competition in private equity is decreasing as funding get harder to obtain.
- Valuations are cheaper now due to the market correction of the last few months.
- Blackstone stock is 47% cheaper then it was when Barron’s wrote the article in June 2007.
However despite the change in those metrics, Barrons continue to believe that BX shares are expensive, however this time they are focusing on 2 new metrics:
- Write downs that will crush earnings.
- Difficult funding conditions.
It seems to me that Barron’s is having it both ways, write downs and difficult funding conditions actually means that valuations and competition is less, thus deals undertaken today, will drive tomorrow’s earnings, while BX may take an earning hit in the next few months, it will build a strong base for strong earnings going forward as it capitalize on lower interest rates, lower valuations and less competition.
Barron’s claims that investors are missing the point about write downs, the stock price however does not seem to indicate that they are missing the point, an almost 50% haircut on the stock price since the peak seem to confirm that investors are more then aware of the write downs, I would venture to say that Barron’s is the one missing the point, by focusing on the next few months earnings, Barron’s is forgetting that PE makes money in a multi-year cycle and they need periods such as today to buy companies on the cheap & borrow on the cheap, exactly the market conditions we have in the early 1990s and 2000s which lead to outsized returns few years down the road for P/E, in addition Barron’s seems to be missing the point by looking at BX as a PE play only, Blackstone is moving beyond private equity, the growth in its hedge fund business and M&A consulting is a new revenue and earnings driver, with Microsoft/Yahoo deal advisory win a case in point.
BX is still expensive in our current economy.
Again re-evaluation of a stock is based on the fundamentals of a company as well as the economy outlook of the moment. Right now I see BX at $10 & it is a matter of 2 months before we get there. The situation has no changed & I encourage everybody to sell.
Have a good day Sir.
Fred, do you smoke ganja or do any type of drugs, first you come up with a $13 a share for BX, now you say $10, woooouu, can you read news and do you follow stock prices? Can you see that BX is T O D A Y at $17.02 - $17.30 and some changes?
BX value is way above $30 dollars.
You will see this going very high, please wake up and smell the coffee OR YOUR DRUGS IF YOU PREFER, do you realise that today is Thursday? Can you remember what is your mom and dad names is? I think you are smoking too much crack.
Watch out on articles from Barron's. Several years ago perhaps 5 years ago. Barron's came out with an absolute glowing article on a company I happened to own at the time the name was Astropower dealing in solar power for both commercial and residential use.
They stated in the article that it was their best bet for fastest growing small company at the time and best managed.
Bottom line, not more than two months after that article, they missed filing financials, management left under a cloud and the company stock went form the 70's to less than a dollar in days.
Perhaps they were fooled like most investors were, but watch out for their articles. they may be dated or not current in their research or analysis.
I was looking amongst the Professional fund managers, and only 6 funds listed Blackstone as one of their top 15 US Equity holdings. This seems to indicate that even if blackstone is cheap at these levels, professionals simply dont feel the reward is worth the risk. I tend to agree, considering even now, BX is trading at 17x times earnings, while the rest of the sector is half that. Their one year EPS growth rate is also south of -35%. For more info on what the professional holder of BX are doing with their stakes, refer to the link below.
Appreciate your posts. I'm new to BX. Agree with your take on Barrons article; sounds like Barrons is behind the curve.
The WSJ article from August 15 presaged a lot that happened in the 4th quarter.
Wasn't Blackstone active in purchasing a lot of the distressed debt that Drexel had put together back in the 1980s, or am I confusing them with Apollo?
I used to work in banking but have been out of the loop for several years. Where are the best place to look for ...
Private equity deal flow - pipeline & trends
Potential purchases of distressed debt - & market trends (pricing)
Glad you find my posts of value, I believe Apollo is the one who purchased alot of Drexel debt, mainly because Apollo founders came from Drexel.
As for deal flow, a good site to use is thedeal.com, privateequityonline.com, and altassets.com
As for your question about REITs, I believe they do give a good indication on how things are in commerical real estate.
thank you(sucren) for the analysis!I also appreciate your exellent work.
Monday will be new buying opportunity for us.But I won,t buy
more.I also have:FIG,OZM -poor perfomance too.
My REIT-s are better:KFN(best)AHR,NCT,TMA
New investment: SCI - deathcare industry
Andras from Hungary
It's too late to sell Monday morning. All the Wall street heavy hitters read Barron's over the weekend. They all pile in or they all pile out. View it as a further buying opportunity before the trading close.
You know it was the ADS and Microsoft/Yahoo deals that prompted Barron's to write about Blackstone. The thing that has me worried is the commercial real estate side of the business like Hilton. But now is not the time to panic. Money is just now starting to pour into the markets. Keep your powder dry and look for opportunities.
either way Barrons is right, the next few years the business environment is going to go from bad to worse and BX will suffer. I think we need a bottoming process of a few years and then and only then, will the survivors emerge.
BX should survive but it will likely see single digits before any reversal.
Explain how you know what will happen in the business environment in the next few years, especially in the USA, where their idea of long term is Next Monday? It is very interesting how people just like to talk out the asses all the time.
I don’t see BX going to single digits, it is important to remember that market conditions are evolving, the FED extreme reduction of interest rates will shortly have an effect, the world economy continue to march ahead, China just reported 11% GDP growth few weeks ago, the FED, ECB and central banks around the globe have pumped trillions in the world financial markets to enhance liquidity, at a certain point in the next few months, the situation will not as bleak as it did few weeks ago.
Going back to interest rates, the FED cut the interest rate from 5.25% in June when BX came public to 3% today, this is a massive 43% decrease in interest rates in 6 months, we are at the same level of interest rates as May 2005, or just before the massive growth in the PE business, lower interest rates are of particular interest to BX for the following reasons:
- Low rates will kick start the US economy in the next few months.
- Low rates will have move piled PR debt, as the debt high yield looks more attractive in a 3% interest environment, combined with enhanced prospects of the companies underlying the bonds due to a better outlook for the economy due to those same rates.
- Low rates will help BX borrow at a lower rate compared to 2006/2007, or at least at the same interest rate as lower rates compensate for the enhanced risk premium on high yield today.
A way to gauge how BX will perform going forward is to look at financials, the XLF has rallied by about 25% since hitting bottom in early January, BX will trade more and more along with financials as it expand its none P/E business.
Finally, a point I would like to make, companies are not just about brand or products, companies are defined by people, a company is not a logo, a company is an expression of the people behind them, Schwarzman has a proven track record, he has built BX into a financial power house in a matter of 20 years, making BX a company compared to the likes of Goldman Sachs a company that has been around for over a 100 years and has over 31000 employees compared to BX 770 employees!, BX is at start of its life cycle, not at the end of it, Schwarzman is one of those people who have both vision and capacity to execute, I believe his vision of Blackstone is much more grandiose then the stock price reflect today.
So what BX may go down to $17?, $16?, $15?, who really cares if in 2012 this company shares will be trading at $50 or $60?, and while you wait for this venture to be built you enjoy a 6.5% return on your cash? till you can cash out triple the current price?
A lot of people believe the Chinese have made a mistake by investing in BX, however the Chinese don’t think in terms of months, quarters or even years, the Chinese think in terms of decades, what a better way for China to invest its wealth in the world then by going through BX? No company offer as much diversification as Blackstone does, show me a company that owns over 50 business, with close to 100 billion in sales and employs over a 400,000 people through out the planet?.