Apollo 'Selling Everything That Isn't Nailed Down,' But It's a Buy

NEW YORK ( TheStreet) -- Following significant pullback, this is a good time for investors to pick up shares of Kohlberg Kravis Roberts & Co. ( KKR) and Apollo Management, LLC ( APO), according to Oppenheimer analyst Chris Kotowski.

Shares of KKR closed at $18.30 Wednesday, down 14% from their recent intraday high of $21.33 on April 26. APO closed at $22.64 Wednesday, down 18% from their intraday high of $27.50 on May 7.

In a note to clients late on Wednesday, Kotowski wrote that "we can't find any news to account for the declines," and that the stocks were likely down for two "bad" reasons. First, "yield stocks are out of favor," he wrote, and second, "APO's CEO was quoted at a conference saying that they were 'selling everything that isn't nailed down.'"

"No. 1 is a bad reason because while the private equity (PE)-oriented asset managers do in fact have good yields, they are primarily equity, not fixed-income, vehicles. No. 2 is a bad reason because selling things is how they realize revenues," Kotowski wrote.

"We think the stocks are attractive valued at roughly 7x distributable earnings , he wrote.


KKR's shares trade for 7.7 times the consensus 2014 earnings estimate of $2.39 a share, among analysts polled by Thomson Reuters, which is a pretty low valuation for any profitable company in the current market environment. Then again, the consensus 2013 EPS estimate is higher, at $2.58.

Kotowski estimates KKR's "gross distributable earnings" will total $2.03 a share this year, declining to $1.93 a share in 2014. On an "enterprise valuation basis," backing the balance sheet out of his estimates for management fee revenue and carried interest (the share of profits in investments), or "carry," Kotowski wrote that KKR's shares trade for 7.4 times enterprise value.

Kotowski on Wednesday lowered his price target for KKR to $22 from $23, because of a decline in prices for "yield vehicles" the firm invests in. But the lower target represents potential upside of 20% from Wednesday's close.


Shares of APO trade for just 7.2 times the consensus 2014 EPS estimate of $3.17. The consensus 2013 EPS estimate is much higher, however, at $3.92.

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