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Why KKR Expected to See a Revival in the June Quarter

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Jun. 16 2016, Published 1:18 p.m. ET

KKR misses estimates

KKR & Co. (KKR) is expected to post EPS (earnings per share) of $0.39 in the June quarter—compared to $0.88 in the same quarter last year and losses in the previous quarter. For 2016, the company is expected to see EPS of $0.72 with an implied price-to-earnings ratio of 18x. The company reported its 1Q16 earnings on April 25, 2016. The company missed Wall Street analysts’ economic loss per share estimates of $0.41 per share with $0.65 per share. The company’s net earnings declined due to portfolio depreciation and lower fees.

Unrealized losses increased mainly due to the 19% reduction in First Data Corporation’s (FDC) stock price in 1Q16. So far, the stock rebounded 3% in April. Alternative asset managers reported lower-than-expected earnings in the first quarter due to subdued equity markets.

In 1Q16, KKR’s private equity portfolio and the investments on KKR’s balance sheet declined 0.9% and 5.4%, respectively. The company’s major investments saw weak performance due to a decline in US equities (SPY) following the market rout in 3Q15. These investments include Walgreens Boots Alliance (WBA), HCA Holdings (HCA), Zimmer Biomet Holdings (ZBH), and GoDaddy (GDDY).

Economic net income

KKR reported an economic net loss of $507 million in 1Q16—compared to $599 million in 1Q15. As of March 31, 2016, the company’s assets under management and fee-paying assets under management stood at $126 billion and $94 billion, respectively—a rise of 17% and 9%, respectively, on a year-over-year basis.

In a company press release on April 25, 2016, Henry Kravis and George Roberts, KKR’s co-chairmen and co-CEOs, noted that “Unrealized, mark-to-market declines in a handful of our larger balance sheet investments negatively impacted our reported Economic Net Income this quarter. Our underlying fundamentals across fundraising, deployment, exit activity, and long-term investment performance remain strong.” They added, “Periods with broad market volatility, like we’ve experienced, create meaningful opportunities, and with record dry powder, we feel well positioned to invest and earn attractive returns on behalf of our fund investors and unitholders.”

Alternative investment giant

Founded 37 years ago, KKR provides investment management services to fund limited partners or investors. The limited partners commit capital to private equity players to earn returns over and above the indexed returns. KKR also provides capital market services to its own company, portfolio companies, and external clients.

In the following parts of this series, we’ll look at KKR’s private and public markets, distribution, balance sheet, and valuations.

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