SEI Investments (Nasdaq: SEIC) Deserves Attention

(Stocks in this article: Nasdaq: SEIC, Nasdaq: TROW, NYSE: AMP, NYSE: PNC, Nasdaq: NTRS, NYSE: LM, NYSE: WDR)

SEI Investments (Nasdaq: SEIC), one of my long-term favorites in the financial sector, has fallen alongside its brethren and given value seekers a second chance at opportune entry this year. Still, the stock regained some lost ground last week, and since I suspect it will retest recent lower levels, I would place it on my list of stocks to buy on sale in short time.

I expect SEIC could again lose some near-term support due to a recent analyst downgrade and its own noted SIV related exposure. In SEIC’s recent 10Q filing and accompanying conference call, it noted that it entered into capital support agreements with two mutual funds advised by SEI and subadvised by Columbia Management. The funds hold senior notes issued by Cheyne Finance LLC, a structured investment vehicle or SIV.

S&P recently advised that it would place on credit watch AAA-rated mutual funds that hold Cheyne securities, unless the funds find capital support equal to 50% of the at risk holdings. Thus, in order to preserve the AAA rating on one of its funds, and thus support the interests of its clients (read keep their business), SEI committed $129 million of capital support for the event of need or realized loss. Also, in the event that the marking-to-market of the securities drives the funds to “break the buck” or drop to specified NAV thresholds below a dollar, SEI will provide the difference up to an aggregate of $129 million. This capital will be expensed in the relative period of security sale or asset revaluation.

The company has extended this agreement to cover all of the SIV securities held in its advised portfolios, despite no current requirement to do so. This total SIV interest seems to amount to about $946,652,000, by my estimation. Of all of these, SEI says only the Cheyne securities are not meeting their contract terms. It’s important to note that SEI does not own these securities as principle, so in the event of a broader SIV disaster that places the whole group in greater jeopardy, this loss would likely be incurred by the mutual funds in question, and thus their holders (not SEIC directly). While this worst case scenario would not hit SEI’s book directly outside of the lost fees on lower assets managed, it could, however, lead to some redemptions of invested capital. Considering that this worst case scenario example would be something endemic to the system, I would not expect significant damage to SEI’s business reputation to result.

Clearly, this is not good news though, given the delinquent status of the Cheyne securities, but the risk is measured and unrelated to SEI’s ongoing operations. The company is clearly making a good faith effort, and it should go some ways to building client loyalty. Also, the specified amount of support is not an estimate of actual loss that might be incurred, and it seems to me that SEI’s subadvisor will seek to dispose of the securities, but not in the rushed manner of a forced sale. An example offered by the company placed an estimate of loss at $7.2 million pretax, based on recent security values. Depending on future market factors, this could clearly vary.

And what do you like then about this company Greek?

Over the past ten years, through 2006, this stock has offered its shareholders an average annual total return of 33%. From 1997 to 2006, return on assets has improved ten percentage points, to 27.3%. Over the last five years, earnings have grown at an average annual pace of 17.9%. Standard & Poor’s gives SEI Investments (Nasdaq: SEIC) a “Quality Ranking” of A+, meaning it views the stock as among market leaders in providing growth and stability of long-term earnings and dividends.

The company’s not immune to the recent general stock market pain, since much of its income is tied to the value of assets under administration. Since those values are likely not benefiting from turmoil in equity and fixed income markets, the stock has other reason to retrace some of its recent climb. Still, I say look to this weakness to add this stock to holdings soon.

SEI's Business

The 10K will tell you that the company is a provider of asset management services, investment processing and investment operations solutions. What’s that mean? Well, the way I see it is, the company provides the technology that allows managers of trusts and other portfolios to keep track of things and operate efficiently. At the same time, SEI offers those responsible for specific capital pools, like pension funds and enterprise investment capital, to put that capital to its best use. SEI does this by offering asset allocation and investment vehicle direction, and acts as a manager of managers.

To put it simply, the company has developed a scalable and competitive technology offering and investment service. As SEI grows its client base, and it’s good at doing that also, it leverages revenue over a relatively static spend in technology development. Now, when I say static, I do not mean SEI’s management team is sitting on its rears; a good deal of capital is directed to R&D, in order to keep on top of evolving client needs. The company wants to keep its client base happy, while at the same time expanding that base.

An example of the company’s success in marketing its offering, and providing evidence of its viability, assets under management and administration have grown to $201.7 billion and $422.6 billion (Sept. 2007), respectively, from $120.4 billion and $288 billion in 2004.

Company	Ticker	Price-to-Man'd/Adm'd Assets
SEI Investments	Nasdaq: SEIC	1.4%
Ameriprise Financial	NYSE: AMP	2.7
T. Rowe Price	Nasdaq: TROW	4.0
PNC Financial	NYSE: PNC	1.7
Northern Trust	Nasdaq: NTRS	0.4
Legg Mason	NYSE: LM	1.0
Waddell and Reed Fin’l	NYSE: WDR	4.7

(Data as of November 29)

Within the peer group I looked at, some of the firms simply manage assets, while others also provide other services, so perfect comparison is not possible. However, SEIC still compares well on a relative valuation basis in my view. The shares trade at 19X analysts’ 2008 EPS estimate consensus of $1.56, and while sporting a 15% analysts' long-term growth forecast. The shares’ resulting P/E/G ratio of 1.3 is attractive in my view. However, as I said, the recent analyst’s downgrade and confusion about this SIV risk has discounted the stock and may offer further near-term opportunity to pick up SEIC on sale.

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