An Option Strategy on The Blackstone Group, LP
The purpose of this series of articles is to convey income-enhancement opportunities related to the sale of out-of-the-money options on stocks with a market capitalization of above $10 billion that possess attractive investment attributes. In the case of The Blackstone Group (BX), this includes impressive upward earnings momentum in recent quarters, bright growth prospects for the coming years, and a healthy yield of 5.2% (based on estimated distributions per unit over the coming year). The option-writing strategy worked quite well with previous companies featured in Value Line Selection & Opinion, including Chevron (CVX - Free Chevron Stock Report), Verizon Communications (VZ - Free Verizon Stock Report), Oracle (ORCL), General Electric (GE - Free General Electric Stock Report), and Boeing (BA - Free Boeing Stock Report).
The Blackstone Group is a leading global alternative asset manager and provider of financial advisory services with assets under management (AUM) of $248 billion at September 30, 2013. The partnership’s businesses include the creation and management of private equity funds, real estate funds, hedge funds, credit-focused funds, and collateralized debt obligation vehicles. Corporate and public pension funds are among the prime investors in its offerings. Another major revenue source is the provision of financial advisory, restructuring, reorganization, and fund placement services.
Blackstone is headquartered in New York and has offices in 23 other cities around the world. It attributes its rigorous value-oriented investment approach for its excellent investment record in recent years. Indeed, AUM have increased 153% since 2009, aided by demand from professional investors for additional portfolio diversification.
Investment Exits Are Rising
Given the maturity profile of many of Blackstone’s assets and the constructive market environment, it is increasingly taking opportunities to exit investments and realize gains. This activity is driving a shift in its earnings mix toward greater cash generation and capital gains, and this scenario will most likely hold true over the next six months, at least. Total realizations were $26 billion in the 12 months ending September 30th, more than three times that reported over the same period ending in 2012. Exits have been particularly pronounced in Real Estate and Private Equity, and will likely remain at relatively high levels in the coming quarters. The partnership is in these process of placing much of the proceeds from real estate funds, along with considerable inflow from existing and new clients, into a broad scope of income-producing properties in Europe and Asia.
With regard to Private Equity, Blackstone’s largest realization in the September quarter was generated by the sale of its remaining stake in TRW Automotive at a multiple of over seven times invested capital. More recently, it sold its stake in a large hospital operator to Tenet Healthcare (THC) at a healthy profit. Looking forward, the pipeline for realizations is very bright. The partnership has six IPOs on file, which collectively represent nearly $20 billion of AUM.
The Top And Bottom Lines
Thanks to rapid progress in performance and management fees and, to a lesser degree, investment income, revenues are on track to advance over 30% this year, and we look for a modest gain in 2014. A key catalyst for rising fees is the recovering residential markets in the United States and Europe. The increasing global interest in Blackstone’s financial advisory services is another plus. Likewise, earnings per unit, based on economic net income after taxes, may well increase, some 35% in 2013, and we estimate a further gain of at least 10% next year. Finally, the $1.18 per unit distribution paid in 2013 (including the final announced payment of $0.23 in early November) was 127% greater than last year’s total of $0.52.
Blackstone Group stock has increased 83% in price since the close of 2012. Following the third-quarter earnings report on October 22nd, the share price has trended up and reached a high of $29.44 on December 2nd. Even at the current elevated quotation, it offers good total 3- to 5-year total return potential. In light of the foregoing factors, the potential yield from the sale of either a January 2014 covered call with a strike price of $29.00 or the January 2014 cash-covered put with a strike price of $27.00 appears quite attractive. At press time, the bid price of the call was $0.91 (equivalent to $91 per call). In this case, the call entitles the buyer to purchase the stock at $29.00 a share. Since the sale of a covered call implies that the seller owns 100 shares per call sold, the potential profit, on an annualized basis, of about 25%, would be almost 40% if the share price of BX were at or above $29.00 on the January 18, 2014 expiration date.
Meanwhile, the sale of a cash-covered put at the $0.56 bid ($56.00 per put) is the more conservative strategy, given the lower breakeven point, which is $26.44 (7% below the current price). In a margin account, the prospective annualized yield of around 15%, assuming the likely case of BX trading above $27.00 on the January 18th expiration date, would be greatly enhanced. Another favorable consideration for this potential transaction is that Blackstone’s largest quarterly distribution, historically paid in the first calendar quarter with an ex-dividend date of around February 7th, should start to provide additional share-price support in mid-January. Note that the on-line Value Line Option Survey generates numerous ideas along these lines every week.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.