Is Virtus A Stock To Buy On Strong Earnings Forecasts?

Virtus Investment Partners NASDAQ: VRTS is consolidating above key moving averages, just below its September 27 high of $333.03.

On Monday the company said it would increase its quarterly dividend by 83% to $1.50 per share. The company has a seven-year track record of increasing its dividend, according to MarketBeat data.

Just a few days earlier, Virtus announced it had acquired  Westchester Capital Management, a registered investment advisor specializing in liquid alternative investment strategies. Westchester invests in publicly announced event opportunities such as mergers, acquisitions, takeovers, spin-offs, and other corporate reorganizations. The investment objective is to profit from these transactions, once completed.

Westchester has $5 billion under management, which would be added to the  $178.6 billion Virtus is managing, as of the last quarter. That's up 6% from the end of the previous quarter.

Sources Of Income

In the asset management business, gains can come from market appreciation, new clients, or acquisition.

In the earnings conference call, chief financial officer Michael Angerthal said, "The sequential increase reflected $8.8 billion of market appreciation and $1.3 billion of positive net flows."

He added that "AUM remains diversified by product type, with open-end funds, institutional and retail separate accounts representing approximately 42%, 26% and 23% of AUM respectively."

That breakdown is important. Asset management firms could see revenue decline if the market declines. That's because many advisors bill clients a percentage of AUM. If that declines, billings may decline, as well.

Virtus' offerings for individual investors include mutual finds, separately managed accounts, closed-end funds, variable insurance accounts, ETFs, college-savings 529 accounts and UCITs, an investment product available to European investors.

At various times in market cycles, different products go in and out of favor.

In the most recent quarter, the company said net flows of $1.3 billion represented an annualized organic growth rate of 3.2%. That also included positive net flows in retail separate accounts, institutional accounts, and ETFs.

Virtus reports its third quarter on October 27. Analysts expect the company to earn $9.61 per share on revenue of $212.88 million. Those would be increases over the same quarter a year ago.

In the second quarter, the company reported earnings per share of $9.07 on revenue of $9.6 billion. Those are year-over-year increases of 180% and 84% respectively.

For the full year, analysts expect earnings of $35.92 per share, a gain of 122%. Next year, that's seen rising to $43.13 per share, up another 20%.

Analysts have a "buy" rating on the stock, MarketBeat data found. The price target is $327.33, representing a 1.45% upside.

Outperforming S&P Small-Cap Index

Virtus has been a price leader recently, although several other publicly traded investment management firms have also had banner years. Again, growth in broad market value has been a contributing factor industry-wide. Merger & acquisition activity has also driven gains in some firms.

The stock has returned 17.40% in the past three months, 49.29% year-to-date and 118.77% in the past year.

Virtus has a market capitalization of $2.459 billion, putting it just on the cusp between small-cap and mid-cap. It's a component of the S&P 600 small-cap index.

Its performance has outpaced the S&P 600, which is down 1.04% in the past three months, up 21.88% year-to-date and up 55.90% on a one-year basis.

The stock gapped out of a second-stage base on August 5, passing a buy point above $300.54. It trended above its 10-day moving average until September 20, when it pulled back 5.56% as the broader market also declined sharply.

After rallying to their September 27 high, shares pulled back again with the September 28 market retreat. The stock again found support above its 10-day line, an indication that institutional investors have a strong degree of confidence in the stock, and are not bailing out.

This remains one to watch, as market volatility could bring about more declines, and you don't want to attempt buying the dip, while there's plenty of room for that dip to deepen.