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

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.

APO

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.

Kotowski estimates that distributable earnings for APO will total $3.01 a share in 2013, declining to $2.82 in 2014. Based on his estimates, APO's stock trades for 7.0 times enterprise value.

The analyst on Wednesday lowered his price target for APO to $32.50 from $34, but the new price target still represents potential upside of 44% for the shares.

For both companies, investors are concerned that there may be a slowdown in distributable carry and gains for investments made at huge discounts before 2010, "but since 2010 these two companies have deployed more than $27B that is likely to generate future carry," Kotowski wrote.

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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