Cppenhelmer & Co (C?

") appears Lo be an under-earnlng, mlddle-markeL lnvesLmenL

bank. Powever, lL ls predomlnanLly a caplLal llghL, hlghly cash generaLlve, and growlng
prlvaLe cllenL and asseL managemenL flrm. 1hese segmenLs have been marred by recenL
poor performance ln Lhelr caplLal markeLs group and shorL-Lerm legal lssues. C? Lrades
below lLs Langlble book value, a masslve dlscounL Lo lLs peers, and presenLs a poLenLlal
near-Lerm caLalysL Lo hlghllghL Lhls dlsconnecL.
!"#$%&'()*
C? derlves over 67 percenL of lLs $932 mllllon of 2012 revenue from lLs prlvaLe cllenL
(C") and asseL managemenL (AM") buslness. lL has over $81.8 bllllon of asseLs under
admlnlsLraLlon (AuA") and $23.8 bllllon of asseLs under managemenL (AuM"). 1he C
group offers full-servlce brokerage, wealLh plannlng, margln and securlLles lendlng
Lhrough over 1,400 flnanclal advlsers Lo hlgh neL worLh famllles and mld-slze
lnsLlLuLlonal cllenLs. C? makes money Lhrough a mlx of commlsslons, securlLles lendlng,
and advlsory fees on cllenL asseLs. uue Lo Lhe currenL raLe envlronmenL, lnLeresL lncome
from margln balances and fees from cash sweep programs are pracLlcally non-exlsLenL.
1helr AM group provldes a mlx of proprleLary and Lhlrd-parLy advlsory servlces Lo reLall
and lnsLlLuLlonal cllenLs. lL offers separaLe managed accounLs, fee-based non-
dlscreLlonary accounLs, lnsLlLuLlonal flxed lncome sLraLegles, and alLernaLlve vehlcles. ln
Lhelr famlly of alLernaLlve vehlcles Lhey Lake 2 and 20.
AM ls a hlgh-margln and very sLable buslness. C? allocaLes 22.3 of Lhelr AM fee
revenue Lo Lhelr AM segmenL and Lhe remalnder Lo Lhelr C group. 1hls fee revenue
before any esLlmaLe of performance fees ls on a run raLe of over $330 mllllon, or abouL
1.67 of average AuM of $21 bllllon.
(ApproxlmaLely $20 mllllon per quarLer allocaLed Lo AM group / .223 * 4 = $333)
C? has a sLrong Lrack record of growlng AuM. lrom 2003 unLll 2007, Lhey grew AuM
from $9.3 bllllon Lo $17.1 bllllon, and from a low of $12.3 bllllon ln 2008 back up Lo
$23.8 bllllon. All of Lhls growLh has been organlc.
C? [usL recenLly sLarLed breaklng ouL segmenL lncome and marglns, before legal and
corporaLe overhead expense. 1he C and AM group have lndusLry conslsLenL marglns
around 10 and 30. 1hese groups are now on a run raLe of over $90 mllllon pre-Lax
(pre-corporaLe overhead / legal expense) operaLlng lncome.
C? Lrades aL a dlscounL Lo lLs $23.42 per share of Langlble book value. 18v ls prlmarlly
made up of corporaLe bonds, munls, agency securlLles, $86m of A8S, $38m of morLgage
servlclng rlghLs, and a repo book. 1hey have no loans or derlvaLlve asseLs.
no oLher C or AM flrm Lrades anywhere near a dlscounL Lo lLs 18v, and Lhey usually
Lrade aL hlgh mulLlples of earnlngs as 18v does noL reflecL Lhe underlylng earnlngs
power of Lhese sLeady, hlgh-margln, fee-earnlng buslnesses LhaL requlre mlnlmal
Langlble caplLal.
lLs mosL slmllar compeLlLor, Canaccord llnanclal, whlch also has an under-performlng
lnvesLmenL bank LhaL ls a larger componenL of lLs LoLal revenues Lrades aL 2.2x 18v. Cl
has 2x Lhe markeL caplLallzaLlon, wlLh 70 of revenues, wlLh only $27 bllllon of AuA, and
$17 bllllon ln AuM.
8aymond !ames llnanclal has 21x Lhe markeL caplLallzaLlon even Lhough lL only has 3x
Lhe AuA ($403 bllllon) and 2x Lhe AuM ($36 bllllon). 8!l Lrades 2x 18v wlLh a /L of
16.4.
SLlfel has 9x Lhe markeL caplLallzaLlon even Lhough lL only has 1.83x Lhe AuA ($181
bllllon). lL Lrades 2.3x 18 wlLh a /L of 20x
Looklng aL pure AM flrms, Lhe valuaLlon dls-connecL ls as pronounced.
Cohen and SLeers has $48 bllllon AuM and $270 mllllon ln revenue. lL has a markeL cap
$1.7 bllllon, whlch ls 3x C? even Lhough lL generaLes half as much fee lncome over
more asseLs. lL Lrades 8.7x 18v and /L of 24.3, and 3.3 of AuM.
zena lnvesLmenL ManagemenL has $22.3 bllllon of AuM and $88 mllllon ln revenue. lL
has a markeL cap of $643 mllllon, whlch ls 2x C? even lL generaLes x Lhe fee lncome. lL
Lrades 13.4x 18v wlLh a /L of 23 and 2.89 of AuM.
A brlef look aL C?'s hlsLory furLher drlves home Lhls polnL. unLll 2003, Lhe flrm was
known as lahnesLock & vlner, and was prlmarlly a broker-dealer wlLh a C and small AM
buslness. 1haL year, Lhe flrm purchased Cppenhelmer, Lhe C & AM buslness of Cl8C,
for $230 mllllon. 1hls was an excellenL LransacLlon LhaL lncreased AuA from $17.8 bllllon
Lo $46 bllllon and AuM from $869 mllllon Lo $9.6 bllllon. 1hls LransacLlon also hlghllghLs
why Langlble book ls a poor proxy of value for Lhese flrms. 1hls LransacLlon was funded
wlLh debL and reduced 18v from $19.20 Lo $8.63 per share, slnce Lhen even wlLh all Lhe
resulLlng legal lssues Lhey have grown 18v Lo $29.32 per share (ad[usLed for dlvldends)
for a CAC8 of 13. lL ls lnLeresLlng Lo noLe LhaL Lhe flrm pald $230 mllllon for $30 bllllon
ln AuA and $9 bllllon ln AuM, whlle Lhe enLlre markeL cap ls now $310 mllllon for $81.8
ln AuA and $23.8 ln AuM.
,&")-"#./') #'01- .233 " -/0/3"& -.'&45
ln !anuary 2012, 8aymond !ames purchased Morgan keegan for $930 mllllon aL (1.33x
18v). 1hey acqulred 1,000 flnanclal advlsors, $70 bllllon ln AuA, and Lhelr flxed lncome
and equlLy caplLal markeLs group. 1hls LransacLlon ls lllusLraLlve of Lhe value of [usL Lhe
AuA, and ls noL comparable for Lhe value of Lhe AM parL of C?'s buslness.
6--(2-
Cn-golng expenses from aucLlon raLe securlLy (A8S") llLlgaLlon, as well as poor
performance and lnLegraLlon expenses from lLs 2008 acqulslLlon of Cl8C's caplLal
markeLs group have marred Lhe underlylng value of C?. 8oLh of Lhese lssues seem Lo
be mosLly resolved.
1hey have seLLled a handful of lndlvldual lawsulLs over Lhe pasL 4 years relaLed Lo cllenL
exposure Lo A8S, and l belleve Lhere are no ma[or lawsulLs remalnlng. ln 2008, cllenLs
held over $2.8 bllllon of A8S, and as of Lhe lasL quarLer Lhls ls now $193 mllllon. 1he
company ls commlLLed Lo purchaslng anoLher $34 mllllon from Lhelr cllenLs Lhrough
2016. 1helr 2008 acqulslLlon of Cl8C's remalnlng caplLal markeLs buslness was lncredlbly
poor Llmed. 1oLal expenses lncreased from $787 mllllon ln 2007 Lo $936 mllllon ln 2008
whlle revenues were baslcally flaL aL $920 mllllon. 1he resulLlng reLenLlon paymenLs,
lnLegraLlon expenses, and masslve decreases ln revenues have pressured Lhe company
for Lhe lasL few years. CLher" expenses lncreased from $70 mllllon ln 2007 Lo $112
mllllon ln 2011, before peaklng ln 2012 aL $140 mllllon due Lo a large A8S seLLlemenL.
CLher expenses are now on a $110 mllllon annuallzed run-raLe, and wlll lmprove as legal
expenses conLlnue Lo come down. 1he company moved offlces ln 2012 generaLlng
slgnlflcanL renL savlngs. Whlle Lhe caplLal markeLs buslness conLlnues Lo be weak lL ls
now sllghLly proflLable before corporaLe and legal expenses.
7'.2)./"3 8"."34-.
uue Lo Lhe currenL raLe envlronmenL, C? ls hlghly leveraged Lo performance fees ln lLs
alLernaLlve vehlcles. 1hese performance fees are earned ln Lhe fourLh quarLer. C?'s
earnlngs ln 4C12 were lmpacLed by Lwo evenLs: hurrlcane Sandy and an adverse legal
rullng. Sandy shuLdown Lhelr headquarLers and forced employees Lo work from home or
back-up locaLlons for over one monLh. Secondly, 4C12 pre-Lax earnlngs were furLher
reduced from $23 mllllon Lo $-7 mllllon due Lo a $30 mllllon A8S [udgmenL.
2013 ls seL-up Lo be a monsLer year. C?'s AuM are up $1.6 bllllon ln performance
Lhrough SepLember 30
Lh
, and alLhough lL ls noL clear Lo whaL exLenL Lhey Lake
performance fees on all Lhese funds, l Lhlnk lL ls llkely LhaL Lhere ls maLerlal upslde. ln
2012, a year when Lhe markeL was up abouL 10 performance fees were $11.1 mllllon.
ln 2007, Lhe company generaLed over $44 mllllon ln performance fees. Any remalnlng
hlgh-waLer marks have llkely been meL and l belleve Lhere ls maLerlal upslde as equlLy
markeLs have marched hlgher slnce Lhe end of C3.
lor 4C13, assumlng a $7 mllllon pre-Lax operaLlng lncome (afLer corporaLe & legal)
across all dlvlslons before any performance fees, whlch ls slmllar Lo C1-C3, we would
geL Lo $27 mllllon pre-Lax operaLlng lncome. l Lhlnk $30 mllllon ln performance fees and
LoLal pre-Lax operaLlng lncome of $60 mllllon ls easlly achlevable. lor Lhe year C?
would reporLs LS around $2.87 per share. 1hls ls ulLlmaLely a blL of a guesslng game as
C? does noL glve Loo much deLall on Lhelr alLernaLlve vehlcles.
9"3("./')
8egardless Lo Lhe exLenL of Lhe near-Lerm caLalysL, C? ls cheap on a relaLlve and
absoluLe basls.
C? ls currenLly wlplng over $7 mllllon per quarLer [usL ln money markeL fees. 1hls
equaLes Lo over $2.03 per share of earnlngs. Cverall, ln 2007 wlLh $68 bllllon ln AuA Lhe
company had lnLeresL from margln, lulC fees, and money fund producLs of $114 mllllon,
whlch was down Lo $33 mllllon ln 2012 on $80 bllllon ln AuA.
l Lhlnk a very conservaLlve esLlmaLe of normallzed LS would be $3.23:
$28 mllllon ln money markeL fees
+ $27 mllllon operaLlng lncome across all dlvlslons before performance fees
+ $13 mllllon average Lhrough Lhe cycle performance fees
= $68 mllllon pre-Lax * .63 = $44.2 / 13.6
=$3.23
erformance fees:
2007: $44.8 mllllon, 2008: $1.3 mllllon, 2009: $10.3 mllllon, 2010: $12.9 mllllon 2011:
$3.00 mllllon, 2012: $11.1 mllllon
uLLlng a below average mulLlple of 12x geLs Lo $39.00 per share.
AL 1.3x 18v $37.30
AL a conservaLlve 3.0 of AuM or 2x sales, C?'s AM buslness would be worLh $32.37
1hese valuaLlons are deslgned Lo be very conservaLlve. 1here ls addlLlonal maLerlal
upslde from addlLlonal lnLeresL margln, hlgher performance fees as AuM have grown,
and lmprovemenL from Lhe lnvesLmenL bank.
:")"%202).
C? ls run and ma[orlLy conLrolled by Alfred LowenLhal. Pe has a loL of owner-operaLor
characLerlsLlcs and a very solld long-Lerm Lrack record. Pe owns 23.3 of Lhe company,
and conLrols Lhe flrm Lhrough ma[orlLy ownershlp of Lhe class 8 shares, whlch have sole
voLlng rlghLs.
Pe has run Lhe buslness slnce 1987 and has grown Lhe flrm from $13.73 ln 8vS ln 1998
Lo $41 (ad[usLed for dlvldends) Loday for a CAC8 7.36.
; <2= )'.2->
ln 2011 Lhe company expanded lnLo provldlng a varleLy of servlces Lo developers of lPA
approved commerclal properLles. 1hls buslness ls dolng abouL $40 mllllon ln revenue
and $10 mllllon ln operaLlng lncome.
l Lhlnk a large reason why Lhey have noL boughL back more sLock ls due Lo Lhelr A8S
seLLlemenL ln 2010. lL would noL look good Lo bargaln down your purchase
commlLmenLs and Lhen aggresslvely buy-back sLock.
C? has Lwo slgnlflcanL ouLsLandlng lawsulLs. Cne ls agalnsL Cl8C for $143 mllllon and
anoLher agalnsL ueuLsche 8ank relaLed Lo Lhelr 2012 A8S seLLlemenL. 1hey belleve u8 ls
ulLlmaLely responslble for Lhelr 4C12 A8S paymenL.
l have Lrled Lo conLacL Lhe company and geL answers Lo Lhe amounL Lhey expecL Lo fee
on Lhelr performance, Lhe composlLlon of Lhelr cllenL asseLs ( PnW, lnsLlLuLlonal),
normallzed oLher expense" and oLher perLlnenL quesLlons, buL l have noL been able Lo
geL ln conLacL wlLh anyone aL Lhe flrm.