Most investors like it when the stock market goes up. But for investment management specialists like Oaktree Capital (OAK), strong financial markets mean even bigger profits, and that can help them benefit even more when times are good. As the stock market has soared to new highs, so too has Oaktree seen signs that its business is improving dramatically and could grow further.
Coming into Thursday's first-quarter financial report, Oaktree investors were hoping the company would be able to take advantage of better conditions. Oaktree's results were extremely encouraging, and they show that the investment manager appears to be on the right strategic course for the future. Let's take a closer look at Oaktree Capital to see how it did and what's ahead for the company going forward.
Image source: Oaktree Capital.
Oaktree keeps milking the markets
Oaktree Capital's first-quarter results built on the momentum that it started creating late in 2016. Total GAAP revenue soared 14% to $289.6 million, and segment revenue was up even more sharply, posting a 25% rise to $391.2 million and easily topping the consensus forecast for 10% growth. Adjusted net income climbed by more than half to $162.1 million, and that translated into adjusted net income per Class A unit of $0.86. That compared favorably to the $0.77 most investors were looking to see from Oaktree.
Looking more closely at the report, Oaktree saw good signs in other areas. Oaktree's favored economic net income metric soared from where it was a year ago, more than quadrupling to $184.6 million and working out to $1.02 per Class A unit. Assets under management climbed by 3.5% to $100.3 billion, and incentive-creating assets posted modest gains even though the amount of assets generating management fees actually fell about 1% from year-ago levels. Favorable markets helped Oaktree fundamentally, with changes in market value adding $870 million to assets in the closed-end fund arena and $883 million in open-end mutual funds.
Oaktree nevertheless faces some ongoing challenges. Management fees were down 8% from year-ago levels, and the company blamed liquidation of some of its closed-end funds as the primary contributor to the downturn. Added capital commitments helped offset some of those declines, but they weren't enough to stem the tide entirely.
CEO Jay Wintrob was happy about how the company did:
Highlighting a solid beginning to 2017, Oaktree delivered a 25% increase in distributable earnings ... Continued strong investment performance across our closed-end funds has led to 30% growth in net accrued incentives over the last 12 months and bodes well for future distributable earnings.
What's ahead for Oaktree?
Not only has Oaktree made the most of improving financial market conditions, but it has also increased the amount of ammunition it has to make further investments down the road. The investment management company said uncalled capital commitments climbed to $21.8 billion, up $1 billion just in the past three months. About two-thirds of that money doesn't generate management fees, but that gives Oaktree an incentive to find new opportunities for investment in order to get that money working for its clients.
Oaktree has also made sure its balance sheet and liquidity position give it the flexibility it needs to handle whatever comes up for the business. The company's capital position remained unchanged from where it was last quarter, and cash net of outstanding debt amounts to about a quarter-billion dollars. Oaktree also has a borrowing capacity of $500 million under its revolving credit facility, which it can tap at will to jump on opportunities that arise.
Oaktree Capital shareholders seemed generally pleased with the report, and the stock climbed half a percent on Thursday following the announcement. If markets continue to cooperate, then Oaktree is putting itself in a good position to benefit from increased interest from investors, and a healthy dividend yield should reward shareholders on top of any share-price gains that result.
