Morgan Stanley Sees Apollo Global 'Bottoming Out'

In a report published Wednesday, Morgan Stanley analysts upgraded the rating on

from Underweight to Equal-weight. The price target was maintained at $23. The analysts believe the stock has a more balanced risk/reward profile. The stock has underperformed its peers by 19 percentage points, year-to-date, while the Q1 dividend is expected to be at or near the low point of the stock cycle. The dividend declined 61 percent in 1Q15, down 75 percent from its peak in 2Q13. "Our thesis has been that APO's cash earnings would decline as it nears the end of its PE portfolio harvesting cycle and shifts to deployment mode… In 1Q15 we saw this play out, with the PE business only contributing 13c in net realized performance fees, well below the 2Q13 peak of $1.08." the analysts said. Although the analysts expect the company's cash performance fees in PE to remain subdued for the next few years, they also believe that the company is bottoming out, as reflected in the stock valuation and consensus forecasts. If the share price was going to drop to $18, as expected via a bearish perspective, it would have already done so following the recent management share sales and the weakest results since 2Q12 being reported for 1Q15. The analysts therefore believe that the bad news is already priced into the share price decline. According to the Morgan Stanley report, "Faster deployment in Fund VIII won't benefit near-term cash earnings, but it could boost or pull forward the start of APO's next harvest and the meaningful inflection point in cash earnings we expect in 2018." The analysts also believe than acceleration in fundraising in Apollo Global's credit business could boost management fee earnings.