Invesco Stock Up 7% Today – Time to Buy IVZ Stock?

The price of Invesco stock is surging 7.5% in pre-market stock trading action this morning at $26.75 following rumors of a potential merger with the asset management unit of State Street.

According to an exclusive report from the Wall Street Journal, discussions are still at an early stage and may not result in an agreement but, if the deal comes through, it would be one of the largest business combinations in the past decades among Wall Street firms considering that State Street manages over $4 trillion in assets and Invesco another $1.56 trillion.

A combination of these two investment management giants makes sense from a strategic standpoint as Invesco offers a wide variety of diversified passively and actively managed products including exchange-traded funds (ETF), closed-end funds, money market funds, and unit trusts that could be easily promoted to State Street large client base while economies of scale could lead to more competitive offerings.

Moving forward, can news of this deal result in a sizable upside for Invesco’s stock? The following article takes a closer look at the price action and fundamentals of IVZ stock to possibly answer that question.

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Invesco Stock – Technical Analysis

The price of Invesco stock had been trading range-bound between $23 and $26 per share for the past two months at least before today’s uptick as market participants appeared to have barely reacted to the release of the firm’s latest quarterly report.

Trading volumes have reinforced the relevance of these two price marks as they have exceeded the daily average on the days that the price action has tagged them, meaning that they are important levels to watch moving forward.

Interestingly, the Relative Strength Index (RSI) has been posting higher highs despite the price stalling at $26 while the MACD has been on a steady uptrend despite the stock trading range-bound.

These two positive momentum readings were possibly anticipating a major move in the stock as the one we are seeing today and they could support further upside for Invesco stock in the following days on the back of this positive development.

That said, the extent to which Invesco stock may advance might be more easily forecasted after assessing the firm’s fundamental valuation.

Invesco Stock – Fundamental Analysis

Invesco’s top-line results have been advancing at a slow but steady pace in the past five years, moving from $4.64 billion back in 2016 to $5.94 billion last year amid the increased adoption of widely diversified investment vehicles such as the firm’s ETFs by both retail and institutional investors.

However, the firm has failed to scale up its operations in a profitable way as reflected by its net income figure, which has been declining in the past four years from $1.13 billion back in 2017 to $761.6 million last year.

As a result, the stock is trading at only 8.2 times its forecasted earnings per share for the next twelve months while it is currently offering an attractive 2.5% dividend yield that is well covered by the company’s cash flow generation capacity.

In the past couple of years, Invesco has been generating over $1 billion in free cash flows and it could be expected that the firm will continue to produce a similar figure in future years.

At its current market capitalization of $11.5 billion, that results in a price-to-cash-flow ratio of 11.5. This ratio is very conservative considering that the firm has grown its free cash flows at a compounded annual growth rate (CAGR) of 22%.

If a merger does take place, it would be plausible to expect a valuation at least twice as high as the current market capitalization of IVZ based solely based on the firm’s cash flow generation capacity – which is the main input used by analysts when drafting discounted cash flow models.

However, there is also the possibility that these discussions may not lead to an agreement and that could result in a full-blown reversal in the price action.

Whether the merger goes through or not, Invesco seems to be attractively valued at its current levels and its dividend yield could be seen as the cherry on top of the ice cream. So far this year, the stock is up 45.7% excluding this morning’s uptick.

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