The company announced it has formally struck a deal to distribute its retirement services through Well Fargo
2Q15 results over night were in line across the board with unchanged revenue and EBITDA guidance for the rest of the year
Fee realization rates were stable pacifying the long term contention of the Bears who fear substantial pricing declines
The setup in the stock is still asymmetrical to the upside with 25% of the float short and 40 days to cover
FNGN remains on our Best Ideas list as a Long position with a fair value of $55 per share
Financial Engines (FNGN) formalized the announcement of Wells Fargo providing their independent advisory services in their 2Q15 earnings presentation last night. While the deal had been speculated by a news outlet during the course of the quarter, the formal announcement adds a solid fundamental catalyst guided to come on stream by the "middle of 2016." It is likely however that with the formal disclosure of the deal out of the way, that FNGN sales and distribution teams are already approaching the underlying plan sponsors within the Wells network and incremental assets-under-management/contract can start to bleed into the firm's numbers (after operational testing). According to the most recent Cerruli retirement survey, assets under administration at Wells currently stand at $168 billion (this counts only 401K plans over $100 million). This would be +16% on the firm's current assets-under-contract of $1.04 trillion. Thinking about a 2 year conversion rate at 13.3% of future assets-under-contract to assets-under-management (at the firm's current realization rate and net margins), put the Wells opportunity at $0.11 in earnings per share. The firm's TTM EPS is currently $0.93, putting the full potential at +11% accretion.
The quarterly print was otherwise in line with the firm hitting adjusted earnings per share estimates and maintaining its top line and EBITDA guidance on an operational basis. The firm's slightly adjusted its top line and EBITDA guidance on an annual basis by $1 million lower (not really worth talking about) solely due to lower average market levels between the 1Q to 2Q print. Annual top line guidance is now $314-320 million from $315-321 million prior with EBITDA guidance settling at $96-100 million from $97-101 million prior. What was encouraging in the quarter, was that absolute new assets from new enrollment during 2Q again reached record levels at $6.5 billion. While a growing base of assets-under-contract assists this production, the conversion rate of AUC to AUM over a 26 month period also ticked up to 13.3% from 13.0% in 1Q15.
Decomposition of the firm's net AUM additions versus subtractions displayed another high in quarterly net enrollments at $6.5 billion (chart below is in $MM):
The 26 month enrollment rate from AUC to AUM also matched a new high at 13.3%
While external realization rate calculations (fee rates) are not that accurate, with AUM and AUC blending into the financials at different times outside of the GAAP reporting periods, investor fears of substantial fee degradation are not justified. Our calculation of the firm's quarterly realization rate remained at 28 basis point for the quarter, in line with 1Q levels and down just 1 basis point year-over-year. Generally, most bearish views on the stock have pricing assumptions declining rapidly into the mid teens which just simply isn't happening yet. We are comfortable that we have put forth a reasonable out year estimate with realization rates on AUM at 25 basis points (assuming some reasonable pricing declines).
The market internals for the stock are still way too bearish and with over 25% of the float short, we continue to see asymmetric upside. Historically, the 20% short interest level has been the buy signal in FNGN stock, which has remained the case throughout the course of this year. In addition, with trading volume having dried up over the past 90 days, the days to cover has now doubled this year to 40.2 days.
FNGN stock continues on our Best Ideas list as a Long position with fair value at $55 per share. We are valuing shares on an assets-under-contract opportunity of $1.3 trillion. With the new Wells announcement already getting us half way there, and the ongoing overly bearish market structure of the stock, we continue to see upside.
Jonathan Casteleyn, CFA, CMT
Joshua Steiner, CFA