Everyday, investors from around the world watch their computer screens looking to see how the markets are doing. What most of us fail to notice is all the work required to process the business done each day. For many in wealth management, the back-office work vital to any successful financial services firm often passes to others. Commonly referred to as business process outsourcing (BPO), one of the key players servicing the wealth management industry is SEI Investments Company (Nasdaq:SEIC), a Pennsylvania-based company whose stock is down 51% in the past 52-weeks. While 2008 hasn't been as kind to SEI as in previous years, I have a hard time believing its haircut is justified. (Read more in The Rise Of The Modern Investment Bank.)
It Has Plenty to Keep It Busy
SEI got its start in 1968 when Alfred West, Jr., its current CEO and owner of 18.8% of its stock, provided credit-lending training to bank loan officers using computer simulation models. It's branched out since then developing six operating segments.
SEI Operations By Segment
|Operating Segment||% of 2007 Revenue|
|LSV Asset Management||25%|
Providing processing solutions to approx 7,300 clients including banks, trust companies, investment managers and other investment advisory firms; growth areas include generating additional business process outsourcing revenue, pursuing new opportunities in Asia and Europe, and capturing more of the baby boomers wealth management business.
Making Do in a Bad Economy
Up until 2008, business was great. Then the global recession hit and SEI, like almost every other financial services companies it goes head-to-head with, such as State Street (NYSE:STT), Bank of New York Mellon (NYSE:BK) and Northern Trust (Nasdaq:NTRS) experienced a slowdown in sales. In October, it reported third quarter results and they were dreadful, especially the earnings. Sales for the quarter were off 10% year-over-year and net earnings dropped 53% in the same period.
As for the nine-month results, they were a little easier to digest. Sales were down 4% to $979.52 million from $1.02 billion in 2007 and net earnings were down 37% to $129.61 million from $206.18 million a year earlier. It delivered to shareholders a 36 cent drop in earnings per share (EPS), down from $1.02 for the first nine-months in 2007. How will this affect its full-year earnings that are due out in March? My guess is the EPS for 2008 will be somewhere around the $1.00 mark. Analysts currently have an estimate of $1.26.
All Is Not Lost
I believe SEI is a good company. Much of the drop in earnings is due to charges incurred from losses in SEI-sponsored money market funds. If not for the 13 cent after-tax charge in Q3, the drop in EPS would have been 16% (6 cents), not the 37% reported. The total losses to date from these structured investment vehicles are $119 million. Once it gets past this trouble and the economy starts to improve, SEI will be back on track, growing profitably. With the exception of 2002, SEI has increased revenues in nine out of the past 10 years from $366.12 million in 1998 to $1.37 billion in 2007. This past year was its only blight on an otherwise perfect scorecard. (Learn more about these types of investments in Understanding Structured Products.)
Despite increasing sales and earnings annually between 2003 and 2007, SEI's stock currently sits at a five-year low. In my opinion, this past year's drop in sales and earnings doesn't merit a stock price that is trading lower than it did in 2004. Call me crazy, but sometimes the markets aren't efficient. This seems to be one of those times.