Monday, April 22, 2013

Investing in Wisdom

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Zacks Investment Research reports Wisdom Tree Investments ( WETF ) has seen some strong net inflows over the past few quarters and has dramatically increased its assets under management of late. As a Zacks Rank #2 (Buy), it is the Bull of the Day.

Inflows For the ETF Industry

One look at the annual net inflows for the ETF Industry and you will see that the growth story is back on. There was $177 billion in net inflows in 2008, but the recession cased that number to slide to $116 billion in 2009. A slight gain was recorded in 2010 with net inflows reaching $118B in 2010 and they stay at that level in 2011. Last year, the industry posted and industry record with $185 billion of net inflows.

2012 Inflows are worth a closer look. The industry saw $53B in 1Q12, followed by $25B in 2Q and then $52B and $55B in quarters three and four respectively. So as the market improved, the industry saw a willingness on the part of investors to move shift their assets from cash. Interestingly, the industry saw a net inflow for fixed income products of $356B with $52B of that coming in the form of ETFS. They noted that equities saw a net outflow of $20B as equity mutual funds saw $153B in redemptions but there was $133B in net inflows for equity ETFs.

Company Description

Wisdom Tree Investments operates as an exchange-traded funds (ETFs) sponsor and asset manager. It offers ETFs in equities, currency, fixed income, and alternatives asset classes. The company also licenses its indexes to third parties for proprietary products, as well as offers a platform to promote the use of Wisdom Tree ETFs in 401(k) plans. It develops index using its fundamentally weighted index methodology. The company was founded in 1985 and is based in New York, New York.

WETF Beats Estimates In Two of Last Three Quarters

Dating back to the June 2012 quarter, has beaten the Zacks Consensus Estimate in two of the last three quarters. The June 2012 quarter saw the company post $0.02, $0.01 ahead of the estimate for a 100% positive earnings surprise. The following quarter saw another one cent beat which translated into a 50% positive earnings surprise.

The most recent quarterly report took place on February first of this year. The company posted revenues of $24M and EPS of $0.04, both were in line with the Zacks Consensus Estimates.

Growing Inflows and AUM

The quarterly net inflows for WETF mimic the results of the broader industry, with a strong 1Q12 followed by a weaker 2Q12. The most likely reason for the slide was the lower equity markets in 2Q12. The following two quarters saw a nice rebound to end the year. For the year 2012, net inflows increased from $3.899B to $4.732B or more than 21%.

Assets under management have been growing at a dramatic pace. In 2009 they stood at $6B and moved to $9.9B in 2010. Another increase pushed the number to $12.2B for 2011 and the company ended the year 2012 with $18.3B in assets under management. That represents an increase of 50% from the prior year.

WETF Sees Estimates Moving Higher

Aggressive growth investors have to like the every growing earnings story at WETF. The company has seen the Zacks Consensus Estimate for 2013 tick higher every month since October when it was $0.24. The estimate has grown to its current level of $0.35 since that time. Similarly, estimates for 2014 have also moved higher. Over the same time period, the Zacks Consensus Estimate has moved from $0.31 to $0.51. That gives and implied growth rate of 45%, and a number like that can turn a lot of heads.


The valuation picture for WETF shows what you would expect to see for a fast growing company with great potential for future earnings. That is code for a high valuation, with the company sporting a 29x multiple of forward earnings compared to a 13x industry average. The key to me is the margin story. The company is posting a pre tax margin of 13% while the industry average is 12.1%, and that advantage flows down to the bottom line. The industry average for net margin over the last twelve months was 5.5% while WETF was able to post 13% net margin. When you can earn more than 2x the industry average, people will pay up if there is growth included.