BUSINESS
Diamond Hill Investment Group, Inc., through its subsidiary, Diamond Hill Capital Management, Inc., provides investment advisory and fund administration services in the United States. It sponsors, distributes, and offers investment advisory and related services to its clients through pooled investment vehicles, including the Diamond Hill Funds, separately managed accounts, and model delivery programs. The company also provides fund administration services, including portfolio and regulatory compliance, treasury and financial oversight, and general business management and governance of the mutual fund complex, as well as oversight of back-office service providers, such as the custodian, fund accountant, and transfer agent. The company was founded in 1990 and is based in Columbus, Ohio.
INVESTMENT RATING
DHIL is expected to continue to be a major Value Builder reflecting capital returns that are forecasted to be above the cost of capital.
Diamond Hill Investment Group In has a current Value Trend Rating of C (Neutral).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing consistent signals. Diamond Hill Investment Group In has a slightly positive Appreciation Score of 66 and a neutral Power Rating of 43, and the Neutral Value Trend Rating results.
Diamond Hill Investment Group In’s stock is selling well below targeted value. The current stock price of $153.02 compares to targeted value 12 months forward of $274.
This moderately high appreciation potential results in an appreciation score of 66 (only 34% of the universe has greater appreciation potential.)
Diamond Hill Investment Group In has a Power Rating of 43. (This neutral Power Rating indicates that DHIL’s chances of enjoying favorable investment performance over the near to intermediate term are only average.)
Contributing to this neutral Power Rating: recent price action has been slightly unfavorable. An offsetting factor is the Investment Advice comparison group is in a strong phase currently.
INVESTMENT PROFILE
DHIL’s financial strength is exceptional. Financial strength rating is 100.
Relative to the S&P 500 Composite, Diamond Hill Investment Group In has both Growth and Value characteristics; its appeal is likely to be to Income-oriented investors; the perception is that DHIL is extremely low risk. Low expected growth is a relative weakness for DHIL. DHIL’s valuation is low: high dividend yield, low P/E ratio, and moderate price/book ratio. DHIL has unusually low market capitalization.
CURRENT SIGNALS
Diamond Hill Investment Group In’s current operations are strong. Return on equity is rising, reflecting: improving asset utilization; widening pretax margins; and rising leverage.
Diamond Hill Investment Group In’s current technical position is very weak. The stock price is in a 28.0 month down move. The stock has declined 24.2% from its prior high. The stock price is below its 200 day moving average which is in a downtrend.
ALERTS
Positive development: significant quarterly earnings acceleration occurred. Negative development: significant quarterly sales deceleration occurred.
The stock is currently rated C.
Diamond Hill Investment Group In (NASDAQ: DHIL) stock enjoyed a large increase of 2.2% on 3/27/24. The stock closed at $153.02. Moreover, trading volume in this advance was above average at 144% of normal. The stock has been weak relative to the market over the last nine months but has risen 1.5% during the last week.
CASH FLOW
In 2022, Diamond Hill Investment Group In experienced a significant decline in cash of -$17.93 million (-18%). Sources of cash were lower than uses. Cash generated from 2022 EBITDA totaled +$78.04 million. Non-operating sources contributed +$23.49 million (+30% of EBITDA). Cash taxes consumed -$26.05 million (-33% of EBITDA). Re-investment in the business amounted to -$19.05 million (-24% of EBITDA). On a net basis, debt investors withdrew -$0.50 million (-1% of EBITDA) while equity investors pulled out -$73.86 million (-95% of EBITDA).
DHIL’s Non-operating Income, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by stability for the Diamond Hill Investment Group In Peer Group. In most years, Diamond Hill Investment Group In was in the top quartile. Currently, Diamond Hill Investment Group In is upper quartile at +30% of EBITDA (+$23.49 million).
DHIL’s Cash Taxes, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Diamond Hill Investment Group In Peer Group. In most years, Diamond Hill Investment Group In was in the lower quartile. Currently, Diamond Hill Investment Group In is lower quartile at -33% of EBITDA (-$26.05 million).
DHIL’s Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Diamond Hill Investment Group In Peer Group. In most years, Diamond Hill Investment Group In was in the top quartile and second quartile. Currently, Diamond Hill Investment Group In is slightly above median at -24% of EBITDA (-$19.05 million).
DHIL’s Debt Investors, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Diamond Hill Investment Group In Peer Group as well. In most years, Diamond Hill Investment Group In was in the second quartile. Currently, Diamond Hill Investment Group In is slightly above median at -1% of EBITDA (-$0.50 million).
DHIL’s Equity Investors, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Diamond Hill Investment Group In Peer Group. In most years, Diamond Hill Investment Group In was in the second quartile and top quartile. Currently, Diamond Hill Investment Group In is lower quartile at -95% of EBITDA (-$73.86 million).
DHIL’s Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Diamond Hill Investment Group In Peer Group. (Since 2020 Change in Cash, %EBITDA has accelerated very sharply.) In most years, Diamond Hill Investment Group In was in the second quartile and top quartile. Currently, Diamond Hill Investment Group In is lower quartile at -23% of EBITDA (-$17.93 million).
DHIL’s Cash, %Revenue has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Diamond Hill Investment Group In Peer Group. In most years, Diamond Hill Investment Group In was in the second quartile and third quartile. Currently, Diamond Hill Investment Group In is slightly below median at +40%.
PROFITABILITY
DHIL’s return on equity has eroded very significantly since 2013. The current level of 26.6% is 1.10X the low for the period and is -65.9% from the high.
This very significant erosion was due to very strong negative trend in pretax operating return and very minor positive trend in non-operating factors.
The productivity of DHIL’s assets declined over the full period 2013-2023: asset turnover has suffered a very strong overall downtrend although it experienced a very sharp recovery after the 2019 low.
DHIL’s pretax margin has exhibited a volatile overall uptrend over the period 2013-2023.
Non-operating factors (income taxes and financial leverage) had a very small positive influence on return on equity.
DHIL’s return on equity is above median (26.6%) for the four quarters ended September, 2023.
Operating performance (pretax return on assets) is at the upper quartile (24.7%) reflecting asset turnover that is above median (0.60X) and above median pretax margin (41.4%).
Tax “keep” rate (income tax management) is lower quartile (69.1%) resulting in after tax return on assets that is at the upper quartile.
Financial leverage (leverage) is at the lower quartile (1.55X).
GROWTH RATES
Overall, Diamond Hill Investment Grou’s growth rate has slowed very considerably in recent years.
Diamond Hill Investment Grou’s historical income statement growth has been lower than balance sheet growth. Revenue growth has fallen short of asset growth; earnings growth has fallen short of equity growth.
Annual revenue growth has been 6.6% per year.
Total asset growth has been 19.0% per year. (More recently it has been -2.1%.)
Annual E.P.S. growth has been 13.0% per year.
Equity growth has been 20.3% per year. (More recently it has been 0.8%.)
No consensus growth rate forecast is available for Diamond Hill Investment Grou.
Relative to the Diamond Hill Investment Group In Peer Group, Diamond Hill Investment Group In historical growth measures are generally top quartile. Equity growth (20.3%) has been upper quartile. Total asset growth (19.0%) has been at the upper quartile. E.P.S. growth (13.0%) has been at the upper quartile. Revenue growth (6.6%) has been below median.
Consensus growth forecast is unavailable.
PRICE HISTORY
Over the full time period, Diamond Hill Investment Group In! stock price performance has been below market. Between May, 2013 and March, 2024, Diamond Hill Investment Group In! stock price rose +87%; relative to the market, this was a -42% loss. Significant price moves during the period: 1) March, 2020 – October, 2021: +140%; and 2) September, 2017 – March, 2020: -58%.
TOTAL INVESTMENT RETURNS
Current annual total return performance of -14.1% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through February, 2024 of -14.1% is lower quartile relative to Diamond Hill Investment Group In Peer Group.
Current 5-year total return performance of 7.8% is below median relative to the S&P 500 Composite.
Through February, 2024, with below median current 5-year total return of 7.8% relative to S&P 500 Composite, Diamond Hill Investment Group In total return performance is at median relative to Diamond Hill Investment Group In Peer Group.
VALUATION BENCHMARKS
Relative to S&P 500 Composite, DHIL’s overall valuation is low. The highest factor, the ratio of enterprise value/assets, is slightly above median. Price/equity ratio is below median. Ratio of enterprise value/revenue is below median. Price/earnings ratio is lower quartile. The lowest factor, the ratio of enterprise value/earnings before interest and taxes, is lower quartile.
Relative to Diamond Hill Investment Group In Peer Group, DHIL’s overall valuation is quite low. The highest factor, the price/equity ratio, is slightly below median. Ratio of enterprise value/assets is near the lower quartile. Ratio of enterprise value/earnings before interest and taxes is lower quartile. Price/earnings ratio is lower quartile. The lowest factor, the ratio of enterprise value/revenue, is at the lower quartile.
Diamond Hill Investment Group In has a major value gap compared to the median. For DHIL to hit median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 2.91X to 4.88X. If DHIL’s ratio of enterprise value/revenue were to rise to 4.88X, its stock price would be higher by $104 to $257.
For DHIL to achieve upper quartile valuation relative to the Diamond Hill Investment Group In Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 2.91X to 7.85X. If DHIL’s ratio of enterprise value/revenue were to rise to 7.85X, its stock price would increase by $261 from the current level of $153.
VALUE TARGETS
DHIL is expected to continue to be a major Value Builder reflecting capital returns that are forecasted to be above the cost of capital.
Diamond Hill Investment Group In current Price Target of $277 represents a +81% change from the current price of $153.02.
This moderately high appreciation potential results in an appreciation score of 66 (only 34% of the universe has greater appreciation potential.)
Reinforcing this moderately high Appreciation Score of 66, the neutral Power Rating of 43 contributes to an Value Trend Rating of C.
Diamond Hill Investment Group In current Price Target is $277 (-1% from the 2022 Target of $281 but +81% from the 03/27/24 price of $153.02). This plateau in the Target is the result of a +7% increase in the equity base and a -8% decrease in the price/equity multiple. The forecasted increase in return on equity has a very large positive impact on the price/equity multiple and the forecasted decline in cost of equity has a slight positive impact as well. More than offsetting these Drivers, the forecasted decline in growth has a very large negative impact.
PTR’s return on equity forecast is 39.4% — above our recent forecasts. Forecasted return on equity suffered a dramatic, variable decline between 2014 and 2022. The current forecast is significantly above the 2021 low of 23%.
PTR’s growth forecast is 5.0% — below our recent forecasts. Forecasted growth suffered a dramatic, erratic decline between 2014 and 2022. The current forecast is significantly below the 2017 peak of 31%.
PTR’s cost of equity forecast is 15.3% — in line with recent levels. Forecasted cost of equity exhibited a modest, erratic increase between 2014 and 2022. The current forecast is above the 2014 low of 12.6%.
At Diamond Hill Investment Group In! current price of $153.02, investors are placing a positive value of $185 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 12.0% per year, and a return on equity of 32.8% versus a cost of equity of 15.8%.
PTR’s 2024 Price Target of $277 is based on these forecasts and reflects an estimated value of existing assets of $157 and a value of future investments of $120.
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