A Gem in the Financial Rough

Did you know there's a stock in the financial sector that has given investors an average annual total return of 26.4% over 10 years? That's impressive by any standard, let alone within the cyclical financial sector.

That stock is SEI Investments (Nasdaq: SEIC), and Standard & Poor's, for one, gives it an "A+" grade on its "Quality Ranking" system. That grade means that SEI is among the market leaders in providing growth and stability for long-term earnings and dividends.

In my book, SEI's chairman and CEO, Alfred P. West Jr., is one of the all-time greats in terms of shareholder-value creation. I would also say he has a vested interest in the success of his firm, given that he holds nearly 38 million shares, whose total value stands at nearly $1 billion, based on the stock's closing price on Sept. 28, 2007. That's a 19% stake in the company.

SEI's performance has been dramatic, although it's not completely impervious to cyclical troughs. It declined 30% annually over the two-year period ended in 2002. However, that was an especially difficult period, in which the S&P 500 Index fell 18% annually. The current period is pretty tough, too, and the company is down 11% since its April high. So perhaps now is the time to pay attention to this company.

A closer look
The company provides the technology that allows managers of trusts and other portfolios to keep organized and maximize efficiency. It also helps the people responsible for specific capital pools, such as pension funds and enterprise-investment capital, put that capital to its best use, by offering asset-allocation and investment-vehicle direction and acting as a manager of managers.

As of June 2007, assets under management and administration had grown to $406.7 billion, a 22% increase from a year earlier. That's a pretty good example of the company's success in marketing its offerings and making them viable.  

Further evidence that SEI is creating value while achieving growth: Return on assets has improved from 17.3% in 1997 to 27.3% in 2006. Now, along the way, the ROA figure has been higher, but SEI has also been evolving its business model to provide more solutions to clients, and that cost has weighed on recent returns.

Even so, the company has kept earnings growth strong and supported its shareholders' interests through share repurchases (assuming that the shares were undervalued in the first place). Earnings have grown at a 17.9% average annual pace over the past five years.

Let's see how SEI stacks up against its peers.

Within this industry, analysts prefer valuing firms on a price-to-assets-managed or price-to-assets-administered basis. Within the peer group we're looking at here, some firms only manage assets, while others, such as PNC Financial, have significant other operations and thus are not perfect comparables.

However, as you can see, trading at 1.3% of assets administered, SEI seems reasonable on a relative basis. In addition, looking at the PEG ratios show that the shares offer investors a bargain based on the price of their earnings growth.

Since we've seen that earnings growth has been reliable over the years, SEI looks to be a diamond in the rough of the financial sector.

Further Foolishness:

• 7 Top Insider-Owned Stocks
• You Can Trust Northern Trust: Fool by Numbers
• A Sluggish Quarter at PNC: Fool by Numbers