SEI Investments (SEIC) is an odd duckling in that it is a financial software provider but is also an investment management shop. Most people have never heard of the company, but the $8-billion-market-cap stock is a household name in investment management circles. The company has steadily grown its revenue and earnings while delivering strong returns for its shareholders. Is SEI Investments still a buy today?
SEI Investments' value proposition
To understand why a company like SEI is in a favorable position as a business, it helps to put yourself in the shoes of a money manager. From client relationships to regulatory issues, money managers have a lot to tackle in addition to the money management function.
Then comes a company like SEI that can provide money managers with a full-service platform that helps them perform all the major operational responsibilities and saves the need to hire as many back-office staff. A platform like this is clearly a value add and allows money managers to focus on servicing their clients.
The interesting thing is that SEI is a vertically integrated investment management business itself. SEI provides software that handles accounting, regulatory reporting, client management, and more, but it also manages money. In other words, a money manager can outsource money management to SEI Investments as well.
A wide range of services covering a wide range of clients
SEI Investments was founded in 1968 as an education and training company for financial professionals but has since broadened its services to handle investment processing, investment operations outsourcing, and investment management. Today, the company has more than 11,000 clients around the world, administers more than $570 billion in assets, and manages in excess of $300 billion in investments.
|Business Segment||2018 Assets Managed or Advised||2018 Revenue|
|Private banks||$48.7 billion||$483.1 million|
|Investment advisors||$65 billion||$399.1 million|
|Institutional investors||$91.6 billion||$333.3 million|
|Investment managers||$579.9 billion||$398.1 million|
|Other||$1.9 billion||$10.6 million|
As the table above shows, SEI Investments' business touches clients across the full spectrum of the investment industry. It's also clear that its revenue varies based on the type of client. In 2018, SEI generated $483 million in revenue from private banks despite only $48.7 billion in assets managed or advised because it provides a full-service product to private banks that includes business process outsourcing and investment management. SEI derives less revenue from investment managers despite significantly more assets overseen because it mostly serves as a fund administrator, a function that carries lower fees relative to asset base size.
Stable financial results
SEI Investment's services are mostly sold on a subscription basis and scale as a percentage of the asset base and scope of the services offered. Because SEI's business is mission-critical for investment management firms, it is incredibly sticky and has a high customer retention rate. Because the subscription business model is recurring in nature, it is quite stable.
The company saw its revenue and earnings decline after the 2008 financial crisis because SEI mostly charges clients a fee as a percentage of total asset value, and asset values declined. However, the company has seen a steady organic increase in revenue and earnings during the recovery.
SEI's organic growth is aided by the tailwind of rising financial asset values. It is also helped by a trend toward companies outsourcing IT to third parties when in the past they might have handled certain regulatory and accounting functions with internally built software. These tailwinds should continue over the long term, providing a nice upward glide path for earnings.
SEI Investments is arguably a very good business because it is financially stable and growing. Despite its "good business" status, the stock isn't particularly expensive relative to most other stocks.
The company's stock price is off of the all-time highs it set last year after a slowdown in growth disappointed investors. Today, the stock trades for a forward price-to-earnings ratio of around 15 times and sports a dividend yield of 1.1%. For reference, the S&P 500 carries a forward price-to-earnings ratio close to 17 times and has a 1.9% dividend yield.
A good long-term investment
There is a lot to like about SEI Investments as a long-term investment. The company's business model has a clear value proposition, its client base is diverse, financial results are stable, and the stock's valuation is reasonable.
The biggest risk SEI Investments faces is that it will see its financial results decline when financial asset prices decline. The company also competes with other financial software companies like Broadridge, SS&C, and several other players.
However, the long-term rewards appear to outweigh the risks, making SEI Investments a good candidate for a long-term investment.