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Morningstar | Active Equity Inflows and Higher Fee Rates Lift AB's 3Q Results; No Change to $29 per Share FVE. See Updated Analyst Note from 25 Oct 2018

There was little in no-moat AllianceBernstein's third-quarter results that would alter our long-term view of the firm. We are leaving our $29 per share fair value estimate in place. AllianceBernstein closed out the September quarter with $550.0 billion in AUM, up 1.9% sequentially and 2.8% on a year-over-year basis. Net inflows of $1.3 billion during the period were worse than our forecast of $2.9 billion. On the plus side, AB generated $2.9 billion in inflows from its active equity operations, marking the third straight quarter of positive flows from these operations. But passive equity outflows of $1.2 billion, as well as $400 million in outflows from AB's fixed-income and other operations, detracted from these results during the quarter. As a result, full-year organic AUM growth is now likely to be in a negative 1%-2% range, down from our previous forecast calling for organic growth of 0% to negative 1% for 2018.

While average AUM increased 3.9% year over year, adjusted third-quarter revenue increased 7.6% due to stronger performance fee income and an increase in the firm's base fee realization rate to 0.416% (from 0.409% in the year-ago period). While year-to-date adjusted top-line growth of 9.8% was slightly higher than our forecast of mid- to high-single-digit revenue growth for 2018, our expectation is that full-year results will still come in closer to our projection. With operating expenses increasing at a much lower rate than revenues, adjusted operating margins of 23.1% through the first nine months of 2018 were more than 400 basis points higher year over year Going forward, we believe AB will gradually improve its margins, especially if it is able to continue to gain traction with its active equity offerings, but we're doubtful that profitability will move much beyond 23%-24% of revenue longer term, given the fee and margin pressures facing the industry (as well as the likelihood of a bear market correction midway through our five-year forecast).