SEI: Whatever It Is, It Works The company operates in the area where technology meets banking. Think back-office services with a twist, and think steady growth
I may be dating myself by quoting vintage Saturday Night Live (for you youngsters, this was from a classic mid-'70s sketch), but that's what comes to mind when I consider SEI Investments, (SEIC
) the computer-systems designer/bank. And I'm not alone in my confusion. "We've lumped them in with trust and custody banks," says Bob Ax, an analyst at Keefe, Bruyette & Woods. But according to Gary Prestopino at Barrington Research, it's SEI's technology platform that really drives their growth.
The classification I like best comes from analyst Brad Moore at Putnam Lovell Securities. "SEI is a service company -- an e-processor -- that relies on selling business-to-business technical services to financial institutions and big institutional investors," he says. However you define what SEI does, all three analysts believe this company will see its bottom line grow roughly 30% annually over the next couple of years.
PROMISES, PROMISES. Yes, you read that right. SEI has a B2B business plan that's expected to yield early-2000-style growth. That may sound almost as retro as the floor wax/dessert topping sketch, but in fact, SEI is
operating in a market that could actually deliver on the promises the New Economy made but has been hard-pressed to keep.
SEI is the outsourcers' outsourcer, and its main client base are financial-service companies, the ones most likely to benefit from Federal Reserve Chairman Alan Greenspan's current inclination toward rate-cutting. At its present price in the low-30s, the stock is an attractive investment, provided, as with all equity investments in the current environment, your investing horizon is longer than six months.
It's telling that SEI's stock price has moved more like a bank's than a tech company's over the last 12 months, rising from lows of around $16 a year ago to a peak of $61 at the end of December. It has come down during 2001 along with the rest of the market, but its decline of 41% from its high still beats the Nasdaq's 63% drop over the past year. Given the company's earnings prospects, SEI's recent stumble may have created a buying opportunity.
SEI has three main businesses, each of which accounts for roughly a third of its revenues -- trust technology, mutual-fund services, and asset management. In each of these areas, SEI sells the processing systems and services that help banks and other financial institutions generate statements for clients, keep track of account values, and generally administer the assets they manage or hold in trust for clients.
In addition to processing, SEI offers investment advisers a package of asset-management services that includes actual investment advice. SEI gets this advice from the top quartile -- as defined by performance -- of asset managers in the country. The company constantly monitors the performance of these asset managers, and hires and fires advisers accordingly.
IN SEI THEY TRUST. In the trust area, SEI is the leader in back-office systems. Its Trust 3000 is used by most major banks as a way of avoiding the onerous information-technology expense of administering a trust and custody department. Not only does Trust 3000 perform many of the back-office and accounting functions of a trust department but it also offers the banks' customers Internet access to their accounts. The banks only need to have customer service representatives on staff, and SEI does the rest.
The trust business has grown with the increase in the number of individual with high net worths. "The assets of the 3 million households that make up this group have quadrupled in the last decade to total $10 trillion," says Moore. And even though those assets may have taken some hits in the recent market decline, Moore estimates that high-net-worth clients have seen their assets shrink less than the broader market.
The business of mutual-fund services is also a growth area, driven by overall growth in mutual funds. "We project annual mutual-fund growth [cash flowing into mutual funds] of 12% to 15% over the next few years," says Moore. That will translate into $45 billion of new revenues for mutual-fund service providers by 2004. In this area, SEI has competition from the in-house IT departments of banks like State Street (STT
), which is administering Merrill Lynch's () funds. But SEI has gained a foothold among clients in the fastest-growing sector of the mutual-fund business -- hedge funds and offshore mutual funds.
Asset management, the company's third business area, has grown rapidly during the bull market, and analysts predict the market's unsteadiness will only increase the demand for active money management. SEI's formula of outsourcing the analytical side of its asset-management business provides smaller banks with a cost-effective way of offering asset management to customers they might otherwise lose.
SYSTEMS IN PLACE. It's the potential for revenue growth coupled with SEI's strong margins -- 16.53% net margin compared to the 13.69% average of its peers like Advanced Data Processing (ADP
) and Bisys (BSYS
) -- that has analysts predicting an upside to the stock of between 33% and 53% over the next year. Some say it could climb as high as $55. That's partly because SEI has already made the investment in systems that competitors are only now starting to make. "What's unique to SEI is that its return on invested capital, at 50%, is well in excess of its peer group," says Moore. "The group's is 15%."
In 2001, Moore and Prestopino of Barrington are predicting 2001 earnings per share of $1.12 and $1.13, respectively, as compared to 87 cents for 2000. Both analysts believe EPS will hit $1.45 in 2002. Prestopino predicts that revenues will grow to $708 million in 2001, and $830 million in 2002. In 2000, the company reported revenues of $599 million.
The one cloud on this horizon could be the shrinking stock market. Since SEI is paid a percentage of the assets it administers, the lower the market goes, the lower SEI's revenue base will go, points out Keefe Bruyette's Ax. Investors taking their money out of stocks and bonds to park them in money markets could exacerbate that phenomenon.
But even so, SEI is "a well-positioned solid company," assures Ax. "If they miss their first-quarter numbers, it will only be because asset flows have gone against them." For the longer term, Ax has a buy rating on the stock. Be it floor wax or
dessert topping, SEI may offer investors a nice play on both technology and financial services over the coming year.
Popper covers the markets for BW Online in our daily Street Wise column Edited by Robin J. Phillips
Copyright 2001 , by The McGraw-Hill Companies Inc. All rights reserved.
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