ALLIANCE BERNSTEIN (NYSE: AB)

Created by: Eric Johanson, 11/1/2012 RATING: BUY Company Profile: Alliance Bernstein (AB) provides investment management services in the US and investment research. As of September 30, 2012 the company reported $419 billion in assets under management (AUM) from institutional, retail, and private wealth clients.

Recommendation:

12-Month Target Price $22.00 Fair Value Range $16-$26 Price When Recommended $16.52 Date of Recommendation 11/1/2012

Company Rating: 3/5

Based on Industry Analysis and Growth Opportunities

Valuation Rating: 4/5

Our intrinsic value estimate versus market price

Key Statistics Current Price Date of Price 52-Week Range Market Cap Dividend Yield
Financial Strength Overall Strength Rating Cash Cash per Share Current Ratio LT Debt to Equity Ratio Payout Ratio
Valuation Trailing P/E Forward P/E Price to Free Cash Flow Price to Book Price to Sales

$16.52 11/1/2012 $11.44-$17.67 $1.74 (bn) 6.11%

Investment Thesis: Currently trading at a discounted AUM/P multiple versus competitors Improving equity market conditions have led to higher AUM, particularly in high-margin equity allocations Favorable dividend yield provides income and supports downside risk We have a positive outlook on financials as cyclical industries should generally outperform in 2013 and beyond as the global economic rebound continues. AB is currently trading at below-peer multiples and our 2013 EPS forecast of $1.25 justifies a target price of $22. This forecast is based on an 8% increase in AUM in 2013, which we believe is realistic given recent positive trends in investment flows. An increase in asset returns has a multiplicative effect on company earnings because as investment returns increase: a) asset pools grow, increasing AUM and management fees b) investors on the sidelines are attracted by higher yields, bringing in additional capital to manage

$1.92 (bn) $6.81 1.25 0.11 100%

n/a 13.21 11.13 1.16 1.59

EPS Growth Forecast:

2013 n/m 2014 2015
8% 8%

Business Summary:
Alliance Bernstein earns 70% of its revenue from investment management fees. Equity assets are charged a higher management fee than other asset classes (e.g. fixed income) due to their risk/return profile and labor-intensive maintenance. Equity AUM is driven by two factors, investment returns and investor confidence, which tend to be positively correlated. Since the financial crisis the financial sector has experienced volatility and investor confidence has been slow to recoverevidenced by the low yield (high demand) for safe, fixed-income instruments. As the global economy regains stability, particularly in the US, equity market conditions should improve followed by investor confidence and increased levels of equity assets under management. Steady asset outflows since 2007 have beaten down AB stock from highs of $95 in 2008 to lows of $12 in 2012. Recently, however, AB has stopped hemorrhaging AUM, and reported consistent investment inflows for the latter half of 2012. These inflows are coming from institutional and retail channels and are being supported by positive investment returns. Display of 2012 AUM improvements from 5-year lows:

Dec '12 Nov '12 Oct '12 Sep '12 Aug '12 Jul '12 Monthly AUM (in $billions) $430 $426 $419 $419 $411 $407 2011 $406 2010 $478 2009 $487 2008 $449 2007 $790

Annual AUM (in $billions)

Valuation:
From a valuation perspective, it appears the market has not totally factored in the companys recent fundamental improvements. AB currently trades at below-peer price multiples to AUM. This can be partially explained by a shift in client preference toward lower-margin fixed income securities. However, even when isolating for equity-only assets, AB is still represents highest value of its peer group.

AB: Alliance Bernstein, LM: Legg Mason, JNS: Janus Capital, IVZ: Invesco Ltd., BLK: BlackRock

Industry Risk Analysis:

Overview: The qualitative measures introduced by Michael Porter's 5-Force framework allow investors to draw conclusions about a corporation that aren't immediately apparent in financial statements, but can have a material impact on future performance. Low industry threat-levels typically indicate that future profits may persist, and vice versa. 1. Threat of Substitutes: Low**

With an increasing number of self-directed discount brokerages in the marketplace, many private clients are switching away from professionally managed portfolios, instead choosing to manage their own finances. While we expect this trend to continue, only 17% of ABs total AUM comes from the private client channel. Institutions (such as pension funds) will continue to require professional management for their asset pools. 2. Threat of New Entrants: Medium***

It is surprisingly simple to start a new asset management firmthe difficulty is in securing assets to manage. ABs rich history of industry-leading investment research coupled with existing relationships with institutions and retail investors give them an advantage over competitors. 3. Bargaining Power of Customers: High****

Due to the vast number of asset managers in the industry and low switching costs, clients are extremely price sensitive. Bargaining power for customers is partially offset by a companys ability to differentiate its offerings. In the case of AB, differentiation would come in the form of worldrenown research and above-peer investment returns. 4. Bargaining Power of Suppliers: Low***

The input in an asset management firm is its human capital. The current employment environment in the asset management industry is very firmfriendly due to the number of qualified individuals looking for work. Recent government and social activity also imposed limits on employee bonuses, restricting the bargaining power of suppliers in the industry. 5. Rivalry Among Existing Competitors: High****

Asset managers are constantly trying to prove they are the most worthy candidate to manage money for institutions and private clients. All competitors in the industry charge about the same price, thus competitive advantage can be achieved through retaining the best employees, innovating new product offerings, and advertising. Large firms like AB have the resources to pay the best employees, invest in new products, and advertise; but it is a constant struggle to remain competitive in these areas.

Conclusion: ABs strong global brand and extensive resources partially offset the tough competitive forces in the asset management industry. Ultimately the Financial Data: company will need to report positive investment results in order to attract and retain client business.

Financial Data: Q3 2012 was a huge quarter in which AB reported positive operating income of $116 million on an adjusted basis. The disparity between GAAP results was due to a $168 million one-time real estate charge which is excluded after adjusting for normal operations. Dividends per share were $0.36, which represent an 8.7% yield on an annualized basiswell above historic average. Last quarter results:

Pro-forma Income Statement:

(in thousands)

2014

2013

2012

2011

2010

2009

Total Revenue $3,053,822 $2,910,180 $2,631,722 $2,749,891 $2,948,557 $2,906,879 Equity Revenue $1,030,176 $971,864 $839,962 $1,067,441 $1,349,952 $1,366,241 Fixed Revenue $1,017,967 $960,346 $868,472 $774,067 $697,308 $523,059 Other Revenue $102,428 $96,631 $84,425 $74,911 $49,432 $31,032 $437,414 $430,521 $434,605 Bernstein Resea $437,414 $437,414 $437,414 Expenses $2,650,937 $2,535,907 $2,321,775 $2,958,360 $2,489,695 $2,316,051 Operating Income $402,884 $374,273 $309,947 -$208,469 $458,862 $590,828 Net Income $369,884 $341,273 $276,947 -$211,567 $427,099 $578,508 EPS estimate $1.35 $1.25 $1.01 -$0.62 $1.58 $2.07
AUM Estimate Equity Fixed Income Other $482,724 $117,766 $279,840 $85,118 $455,400 $111,100 $264,000 $80,300 $419,000 $101,000 $240,000 $73,000

Balance Sheet:

2011 Assets: Cash and cash equivalents Receivables, net Investments PP&E Goodwill Intangible assets, net Deferred sales commission, net Other Total Assets: $1,918,536 $1,339,221 $795,294 $273,104 $2,954,668 $189,661 $59,999 $175,455 $7,705,938

2010 $1,760,082 $1,389,836 $756,555 $300,442 $2,939,170 $205,862 $76,156 $151,284 $7,579,387

Liabilities: Payables $2,705,134 $2,522,685 Accrued compensation and benefits $534,344 $338,560 Debt $444,903 $224,991 Total Liabilities: $3,684,381 $3,086,236 Shareholder's Equity Book Value per Share $4,021,557 $4,493,151 $14.28 $15.96

Comp Analysis:

AB
Market Cap (bn) AUM (bn) Equity Fixed Revenue (bn): EPS (ttm): P/E (ttm): Fwd P/E P/B $1.74 $419.00 $101.00 $240.00 $2.60 n/a n/a

LM
$3.36

JNS
$1.59

IVZ
$10.71

BLK
$32.35

$650.70 $153.40 $369.40

$2.58 $1.08 23.17 11.05 0.63

$152.40 $88.00 $23.80

$0.88 $0.60 14.25 13.46 1.14

$683.00 $3,560.00 $300.00 $1,744.00 $167.00 $1,244.00

$4.04 $1.56 15.41 10.6 1.32 $9.02 $12.91 14.57 12.54 1.33

AUM/P EqAUM/P

12.68 1.08 240.80 58.05

193.66 45.65

95.85 55.35

63.77 28.01

110.05 53.91

AB: Alliance Bernstein, LM: Legg Mason, JNS: Janus Capital, IVZ: Invesco Ltd., BLK: BlackRock

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