Cohen & Steers, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

A global investment manager specializing in real assets and alternative income, providing tailored investment solutions.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Cohen & Steers (CNS) is a niche player in the investment management industry, specializing in real assets and alternative income. Founded in 1986, it offers actively managed portfolios across a spectrum of strategies, including real estate, infrastructure, natural resources, and other alternative asset classes, both in private and public market formats. Their clientele primarily consists of institutional investors such as pension funds, insurance companies, and sovereign wealth funds, with a secondary focus on sophisticated individual investors. The firm is known for its research capabilities and active management strategy, rather than passively tracking the markets. Their investment strategies are generally long term oriented with focus on high quality underlying investments that are designed to be able to produce positive long term performance.

Business Explanation:

Revenue Distribution:

Cohen & Steers primarily generates revenue through advisory and administration fees, largely based on the AUM, or assets under management. The firm’s revenues are not directly tied to market performance, however since they are dependent on the asset value, any change in valuation will be directly reflected in their fee-generating AUM. These fees are generally calculated as a percentage of the AUM managed for clients and also the successfullness of the fund. As of September 2023, Institutional clients account for $82 billion and retail clients account for $19.5 billion.

Industry Trends: The investment management industry is experiencing major shifts, such as a move towards passive investing, increasing fee pressures, and an ever growing importance in tech. Also, there has been more focus on ESG, alternative, private markets and crypto, which is forcing traditional asset managers to adopt different strategies. Also, there is increased competition for traditional asset managers as other alternative managers, private equity and crypto firms eat into their market. Also, market volatility and macro conditions play a very large role in the profitability of the investment firms. To succeed, companies need to focus on technological efficiency, unique strategies and client satisfaction. The market is highly competitive, which makes it hard for firms to stand out.

Margins:

  • Gross Profit Margin: Consistently high, ranging from 75% to 85% in recent years, indicating strong pricing power and cost control.
  • Operating Margin: Variable depending on market conditions and expenses, ranging from 30% to 50%. The company can control its costs, and their employees are well taken care of, which results in the company having decent margins.

Competitive Landscape:

  • Cohen & Steers competes primarily with other investment managers who focus on real assets and alternative investments as well as a small degree of competition with large traditional asset managers. Although they are specialized, they still have to compete against private market, crypto, and index fund managers.
  • The company has a unique expertise, which can be a large advantage, but also makes them very vulnerable to any shifts in market trends and demand for the type of assets they focus on.

What Makes Cohen & Steers Different:

  • Specialized Focus: The company specializes in niche asset classes, especially real assets and alternative income, which gives them a deeper understanding, and an expertise, that is far better than generalists that operate across a variety of classes. This focus has enabled them to develop more tailored and complex investment strategies compared to its peers. Also it makes them a go to choice for those institutional clients who want a specialized manager in specific assets.
  • Active Management Approach: The company emphasizes active management strategies, in contrast to the growing popularity of passive or index funds. This means that they are focusing on finding good investments rather than just passively tracking the market and are constantly researching and analyzing their investment choices.
  • Long-Term Orientation: A commitment to long term investing and high quality assets is very evident and can lead to better value creation and lower the risk of investment losses.

Financials in Detail:

Key Points:

  • Consistent Revenue Growth: The company has shown consistent revenue growth from a year over year point. However due to the variable nature of AUM, there are fluctuations in the revenue based on the valuations. For example their revenue from 2022 to 2023 had barely any growth (122.32 million to 123.72 million.) But the revenue has grown from 32.69 in 2008 to 415.93 million in 2022, demonstrating a significant increase in their revenue over a long time period.
  • Stable Profitability: They have high profitability as seen by high gross margins, but it fluctuates, with their operating margins often around 30 to 50 percent. These fluctuations are primarily caused by market conditions and the expenses required to run the operations.
  • Consistent Cash Flow: They have consistently generated strong cash flows from their operations as they collect high fees. This cash generation is very important and will be used for further investments into the company and the business.
  • Assets Under Management (AUM): AUM has seen good growth from $44 billion in 2012 to $104 billion in September of 2023. The majority of their assets under management are by institutional investors.

Balance Sheet Health (Rating 4/5)

  • Good liquidity - their assets are typically all their operations, which are highly liquid. They don’t require to tie down cash on big assets.
  • Low leverage - their debt-to-equity is really low.
  • Positive cash flow and profit margins.

Recent Concerns / Controversies:

There was a recent article from Barron’s which showed concerns over Cohen & Steers being seen as a “value trap”. It pointed out how the firms have had a lackluster performance as they have failed to participate in the broader market rally in recent years. It noted their underperformance, slow growth, high expense ratio and limited dividend yield. The overall commentary is that the stock is trading cheaply due to all the above reasons which may make it a “value trap” and that there is very limited upside potential. Also, they were downgraded by JMP Securities, which could increase investor concerns. However, on their last earnings call, the management did state that they had “strong” positive inflows, and that their long term revenue stream is continuing to grow. They also mentioned that they are expanding their operations, which in turn should drive growth. Furthermore, the management has stated that they are seeing rising real estate prices, which may indicate that their area of specialization is bouncing back from economic slowdowns. All the mentioned points by management, do contrast the commentary given in the Barron’s article.

Moat Rating: 2 / 5

Justification: Cohen & Steers has some characteristics that indicate a narrow moat that can protect their value but that can also be broken down.

  • Intangible Assets (Brand Recognition): They are a well-known name in the niche field of real assets and alternative income and their name carries weight in the eyes of their target clients. However, they are not widely known to regular individual investors and this niche is not an insurmountable moat.
  • Switching Costs: The company’s clients, which are mostly institutional investors are generally sticky as setting up new asset management operations is generally very cumbersome and has certain associated risks and costs. However, their switching costs are a bit low, because their clients can easily replace them with an actively managed ETF at significantly cheaper fees.
  • Network Effects: Although they are a large player in the space, they don’t seem to show any meaningful network effects where they improve their services and product solely by scaling.
  • Cost Advantages: Their cost advantages may come from scale, where they can hire specialists and experts and also get volume discounts on tools, but that isn’t too significant. A newer company can get to the same scale with sufficient investment.

Understandability: 3 / 5

Justification:

  • The concept of an investment management firm and how they generate revenues through assets under management is not extremely complex. However, the specifics of the industry as well as their methods of operation, types of assets and strategies they follow are complex and can take some time to fully understand.
  • Although their financials aren’t extremely difficult, understanding each type of investment vehicle, accounting for different investment styles, and understanding the importance of goodwill as a separate entity on the balance sheet, and the reconciliation of their adjusted metrics, would make the process more difficult to fully understand.

Summary:

Cohen & Steers is a specialized firm in an industry that shows unique dynamics. They have a strong track record, a well known brand, and good financials. However, they face some competition and a challenging and volatile market. Their narrow moat rating reflects their strengths but also certain limitations. Their balance sheet is very strong and makes them able to operate without any issues. It’s clear that while certain fundamentals are in the business’s favor, the external environment still provides a serious degree of unpredictability. Furthermore their recent struggles and criticisms make it even more challenging to make a buy recommendation based on their current price. Also, given management’s optimistic outlook, more investigation may be required to ensure that what they say actually comes to fruition.