• If you are wondering whether Ares Management at around US$104.80 is a bargain or looks expensive, this article walks through the key numbers so you can judge the value for yourself.
• The stock has risen 2.3% over the past week, which comes after a 3.6% decline over the last 30 days and year to date returns of a 37.0% decline, leaving the 1 year return at a 20.2% decline and the 5 year return at 118.9%.
• Recent attention on Ares Management has focused on its longer term share price performance, with investors weighing up a 35.3% return over 3 years against the more recent 1 year decline. This shift in sentiment is prompting closer scrutiny of whether the current share price aligns with the company’s fundamentals.
• Ares Management currently records a valuation score of 0 out of 6. The next sections will compare what different valuation approaches say about the stock and hint at an even more insightful way to think about valuation that will be covered at the end of the article.

Ares Management scores just 0/6 on our valuation checks. See what other red flags we found in the full valuation breakdown.

Approach 1: Ares Management Excess Returns Analysis

The Excess Returns model looks at how much value Ares Management may create over and above the return that shareholders reasonably require on their capital. Instead of focusing on cash flows, it starts with the equity base, the earnings that equity can generate, and the cost of that equity.

For Ares Management, the model uses a Book Value of $12.68 per share and a Stable EPS of $5.79 per share, based on weighted future Return on Equity estimates from 4 analysts. The Cost of Equity is $1.93 per share, so the Excess Return is $3.86 per share, which reflects earnings above that required cost. The Average Return on Equity used in the model is 27.60%, and the Stable Book Value is $20.99 per share, based on weighted future Book Value estimates from 2 analysts.

Feeding these inputs into the Excess Returns framework gives an estimated intrinsic value of about $87.49 per share. Compared with the current share price of around $104.80, this implies the stock is 19.8% overvalued under this approach.

Result: OVERVALUED

Our Excess Returns analysis suggests Ares Management may be overvalued by 19.8%. Discover 62 high quality undervalued stocks or create your own screener to find better value opportunities.

Approach 2: Ares Management Price vs Earnings

For a profitable company like Ares Management, the P/E ratio is a useful way to think about what you are paying for each dollar of earnings. It links directly to how quickly earnings might grow and how risky those earnings are, since higher growth or lower perceived risk can justify a higher “normal” P/E, while slower growth or higher risk usually points to a lower one.

Ares Management currently trades on a P/E of 50.18x. That compares with a Capital Markets industry average P/E of 39.36x and a peer group average of 16.00x. On these simple comparisons, the shares trade at a higher multiple than both the wider industry and peers.

Simply Wall St’s Fair Ratio for Ares Management is 20.38x. This Fair Ratio is a proprietary estimate of what a more appropriate P/E could be, given the company’s earnings growth profile, its industry, profit margins, market cap and specific risks. Because it blends these company specific factors, it can be more informative than a straight comparison with industry or peer averages that may have very different fundamentals.

Putting this together, Ares Management’s current P/E of 50.18x is well above the Fair Ratio of 20.38x, which points to the shares looking expensive on this metric.

Result: OVERVALUED

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Upgrade Your Decision Making: Choose your Ares Management Narrative

Earlier we mentioned that there is an even better way to understand valuation. Narratives take the story you believe about Ares Management, link it to a clear set of forecasts for revenue, earnings and margins, then convert that into a Fair Value that you can compare with the current price. All of this is available within an easy to use tool on Simply Wall St’s Community page that updates when new news or earnings are released. A cautious view might lean toward the lower analyst fair value around US$113, while a more optimistic view might sit closer to the higher fair value near US$218. Narratives simply make those different perspectives explicit so you can decide which story fits your own assumptions.

Do you think there's more to the story for Ares Management? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.