'Lose-Lose Situation' Is Developing For WisdomTree Investors

Citi’s William R. Katz expects cash burn at WisdomTree Investments, Inc. WETF to begin in 2Q16.

Katz maintains a Sell rating on the company, with a price target of $6.

‘A Lose-Lose Situation’

The analyst believes the risk of cash burn calls into question the company’s capital management policy, strategic flexibility, earnings quality and stock valuation.

“On the one hand, buyback is neutralizing SBC dilution, so investors really don't get the direct benefit of repurchase. On the other hand, if management slows repurchase, earnings are diluted, at a time of sharp share count reductions elsewhere,” Katz explained.

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Apart from a quick turnaround in cash flows, the analyst expects WisdomTree Investments’ cost of capital to continue to rise and compress the currently outsized P/E multiple.

Sale Not Viable

Although investors have been arguing in favor of a sale of the company, Katz pointed out that such a deal would be very risky for both the buyer and the stock valuation, which already discounts the “most likely change-of-control premium.”

On the other hand, AUMs are at their 2016 lows, while attrition has been at very high levels. The analyst noted that a buyer “would either have to dramatically cut expenses to justify paying a premium or rapidly revitalize growth despite mounting competition for Smart Beta mandates before considering cultural fit.”

The EPS estimates for 2016, 2017 and 2018 have been lowered to reflect the deeper than previously expected net attrition and the quarter to date NAV.