Revisiting AllianceBernstein Holdings L.P.

AllianceBernstein [NYSE:AB - $29.65] is one of America’s largest investment management companies. It is structured as a master limited partnership (which trades like stock) while getting the low tax rate and high distribution characteristics that go with the L.P. status.

AllianceBernstein L.P. is comprised of three businesses:

• Global Wealth Management-The Bernstein private client business is focused on helping wealthy individuals and families achieve their financial goals.
• Institutional Investments-AllianceBernstein Institutional Investments is a preeminent resource for institutional investors worldwide, delivering the full spectrum of the firm’s investment services and solutions to many of the world’s leading institutions.
• Institutional Research-Sanford C. Bernstein provides in-depth fundamental research, portfolio strategy, execution and brokerage services.

Revenues and earnings have rebounding smartly since the late 2008-early 2009 market meltdown. Q4 EPS were $0.62 versus $0.27 and Q1 came in at $0.46 against the $0.07 earned at the nadir of the market cycle in March 2009. 

Here are AB’s per unit numbers as reported by Value Line:

Current estimates for run from $2.16 – $2.24 for the current year and from $2.48 – $2.71 for 2011. Zacks is at the low end while Standard and Poors is taking the more optimistic viewpoints.

At yesterday’s close of $29.65 that puts AB’s multiples at just 13.5x the 2010 and 11.4x the 2011 midpoint expectations. Both of those are well below AB’s long-term normalized P/E of 16x. Should AllianceBernstein merely bounce back to even 15 times the mid-range current year estimate of $2.20 we’ll see $33 again by year-end. That same low-normal valuation would bring AB units back up to $39 by the end of 2011 if earnings come in pretty much as expected.

The actual trailing 12-month distribution rate was $2.16 per unit making for a 7.28% current yield on today’s quote. That’s extremely attractive in the near-zero interest rate environment imposed on us by the Fed.

If you add the capital gains potential to the very generous distribution you come up with a fabulous total return potential for holders of these units. Are my $33 and $39 target prices for YE 2010 -2011 realistic? Standard and Poors certainly agrees as they list a 12-month goal price of $38 in their latest research on AB. Just a quick glance at the chart above also confirms that AB changed hands above both my goal prices during each calendar year 2002 right through 2008. When the market was hot they often went for between $40 – $70. If anything, my projected pricing is probably too conservative.

I’ve been writing about AB periodically since March 2009 when the shares were around $15 and I’ve continued to hold and add to my position whenever AB pulled back due to general market action. AllianceBernstein is one of my largest personal holdings.

Option writers should consider selling some puts on AB to try to lock in even lower pricing:

Dr. Paul Price –  www.BeatingBuffett.com

May 18, 2010

Disclosure:  Author is long AB units and short AB puts