Blackstone Group (NYSE:BX) shares debuted in the market during June of last year. Since its initial public offering where the shares hit as high as $38, the private equity company's stock has dropped steadily toward $15 as it has struggled to cope with its own problems arising from the crisis in the markets. Blackstone, which had a long history of making big profits in any market condition, swung to a loss in its fourth quarter, and there are no signs of conditions improving in the near term.
Good Timing For Schwarzman
Some may say Blackstone brought its IPO to market at a bad time. But for Chairman and CEO Stephen Schwarzman, it worked out quite well. He brought the company public and sold off some of his stake right before the private equity well started to dry up. The company has hit a rough patch the last few months, after having a stellar record of consistently making big profits before it went public.
Bad For Investors
On Monday, Blackstone reported that it swung to a fourth quarter loss of $170 million, down from a $1.18 billion profit a year earlier. This was due to write downs on its bad investment in Financial Guaranty Insurance Co. (FGIC). Shares hit an all-time low on the news, trading as low as $13.82, and closing at $15. Management did not try to paint a rosier picture, as Chief Operating Officer Tony James said that things could get worse on the company's conference call.
Adjusted net income for the quarter fell nearly 90% to $88 million (8 cents per share) from $808 million (72 cents per share) a year earlier. Analysts were bracing for a bad quarter, but not this bad, as consensus expectations were set at 19 cents per share.
The biggest drag on Blackstone was writing down the value of its investment in FGIC. News has been swirling about troubles with all the bond insurers and their financial stability, but FGIC recently had its ratings cut by both Standard and Poor's, a subsidiary of McGraw Hill (NYSE:MHP), and Moody's (NYSE:MCO). Management reported that the investment in FGIC has been written down to a few cents on the dollar, and that the write-down reduced fourth quarter revenues by about $120 million. (For more on the downfall of the once stable bond insurance industry, see Fatal Seduction Of The Municipal Bond Insurers.)
Any Good News?
The news was nasty, but the company did record a 47% increase in assets under management to $102 billion from $69.5 billion a year ago. Also, Blackstone reaffirmed its dividend distribution of $1.20 per year paid quarterly. Based on Monday's closing price, that is exactly an 8% dividend, which is quite attractive. But don't necessarily be lured in by that. The company has been performing poorly lately, because the private equity market has dried up. The $120 million from the FGIC write-downs does not account for the more than $900 million swing in profits year over year. The company is not making the same fees on its investments, which is the crux of its business. With clear admissions from management that things have not bottomed, and the current conditions in the market, this is a stock that can continue to drop, and I would stay away in the meantime.
The Bottom Line
Blackstone group used to make returns that were the envy of many investors, but since its IPO the stock has gone no where but down, dropping nearly 50% since its first day of trading. A big drag on the company was its poor investment in FGIC, but its main business of collecting fees on investments has dried up with the overall private equity market. With no signs of clearing up in the near term, I recommend steering clear of the shares.
For more on PE companies, see Private Equity A Trendsetter For Stocks.