Jefferies Sees An Attractive Entry Point for Carlyle, Upgrades To Buy

One analyst is impressed with The Carlyle Group LP CG's strong year of performance and fund raising.

The Analyst

Jefferies analyst Gerald O'Hara upgraded Carlyle Group from Hold to Buy and increased his price target from $23 to $27.

The Thesis

Improving fee-related earnings, or FRE, outlook, stable-to-diversifying segment revenue contribution and the $100 billion fundraising cycle underway could benefit Carlyle, O'Hara said in a note. The analyst expects the pending $22 billion in fee paying AUM rolling on to drive FRE to over $85 million per quarter on a run-rate basis, exiting 2018.

Incentive income, which has a high correlation with the stock price, according to the analyst, is positioned to trend up from the year-ago levels of $1.7 billion. This is especially positive as all current vintage draw down funds are above hurdles but not yet taking cash carry.

Despite growing private equity AUM at 36 percent organic growth rate compared to an industry average of 29 percent over the last 12-month period, O'Hara noted Carlyle trades at a nearly two-turn discount to the group.

"We anticipate a growing net perf. fee balance and sight lines for an additional $50B over the next two years will help narrow that gap," O'Hara said.

Jefferies estimates for 2018 and 2019 are 14 percent and 12 percent above consensus, respectively. Amid the strong performance and capital formation trends, Jefferies sees an attractive entry point for Carlyle.

The Price Action

Carlyle's shares are up about 45 percent over the past year.

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