Too often, companies are painted with a broad brush, and are mistakenly lumped in with seemingly comparable businesses that don’t quite measure up. Case in point: a misreading of the core business model of Ameriprise Financial Inc. (NYSE: AMP). The market still thinks of this company as an old-line insurer. But a business model transformation suggests it’s time for a fresh look.

No longer a traditional insurance company, this company is now a money management juggernaut, with about 9,700 financial advisors and more than $800 billion in assets under management (AUM). But the market is ignoring this transformation. Today Ameriprise sports a price-to-earnings (P/E) ratio of 14.5, which is nearly 24% below the industry average of 19.

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Why the discrepancy? Ameriprise is still widely compared with insurers because life insurance and annuities were the firm’s core offerings when it was spun off from American Express Co. (NYSE: AXP) a decade ago. On average, companies focusing on such products are only trading for around 13 times earnings, thanks to growth-stifling headwinds such as low interest rates and poor pricing power.

But in this case, misperception is the mother of opportunity. At some point, the market will realize its mistake and reward Ameriprise with a substantially higher valuation.

This Buyout Transformed The Company
A crucial part of the firm’s transformation was a $1.2-billion acquisition of investment firm Columbia Management from Bank of America Corporation (NYSE: BAC) in 2010. The deal conferred AUM of $189 billion and greatly expanded Ameriprise’s investment lineup. Today, the firm offers about 3,500 mutual funds through several hundred fund families.

Profits have risen by almost 18% a year since the Columbia deal was completed, and analysts expect a mid-teens pace of growth in the coming five years, thanks to robust expansion of the money management segment. Segment services, which include comprehensive financial planning as well as investment advice, account for nearly two-thirds of pre-tax operating earnings, compared with 45% in 2010.

In time, they could account for as much as 80%, based on recent comments made by CEO James Cracchiolo.

Targeting “Boomers” For Growth
Future growth catalysts include a new advertising campaign scheduled to begin this fall. While Ameriprise hasn’t revealed much about this yet, Cracchiolo recently said it involves close collaboration with advisors to optimize the ad campaign in local markets.

A safe assumption: the enormous baby boom generation will be heavily targeted. Born from 1946-to-1964, the nation’s roughly 75 million “boomers” started hitting retirement age four years ago. Driven by the fear of outliving their money in retirement, they’re expected to seek out financial advice in large numbers over the next couple of decades.

It’s a huge opportunity because baby boomers have had many years to accumulate wealth, so they’re more likely to have large investment accounts and other valuable assets. The greater the number of boomers that financial advisors have as clients, the greater the revenue opportunity.

In many cases, baby boomers are willing to enter into fee-based arrangements where the advisor receives a fee for asset management services and commissions from financial product sales. Because of their dual income sources, fee-based accounts typically carry high margins.

To capitalize on these trends, Ameriprise extensively researches the financial lives of baby boomers and tailors its services to their needs. The ability to provide a full suite of  financial planning, investment and insurance advice enables Ameriprise to have a very sticky client base.

AMP Has Improving Metrics
The firm’s move toward more profitable management services is boosting numerous performance metrics in addition to earnings. For example, the operating and net margins are both markedly improved from three years ago. Also, Ameriprise is delivering industry-leading returns on equity. These averaged almost 20% during the past three years, compared with the financial services sector average of 12%.

In the second quarter, net revenue per advisor climbed 9% to a record $512,000. In the money management division (known within the company as Advice & Wealth Management), operating income increased 13% from the year-ago quarter to $220 million.

Analysts see total revenue rising from $12.3 billion in 2014 to $13.2 billion by next year. Earnings are projected to spike by nearly 30% during the same period to $10.95 per share.

Risks To Consider: Money management fees are directly related to investment account values, so profits could suffer if market turmoil causes the value of the accounts that Ameriprise manages to drop significantly. This risk increases proportionally as the money management segment grows. Also, poor execution of the new ad campaign could compromise the Ameriprise brand.

Action To Take –> Establish a position in Ameriprise Financial before the market realizes that the stock is so cheap. From the current price of about $126 a share, upside potential is roughly 90% over the next five years. Ameriprise is a solid income play, too, with a dividend that has nearly quadrupled to $2.68 a share since 2010. The stock currently yields 2.1%, which is slightly better than the S&P 500’s 2% yield. Ameriprise is financially sound, so shareholders should continue to receive steady dividend raises in the coming years.

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