HENNESSY ADVISORS INC (HNNA) stock intrinsic value fair value estimate & owner earnings analysis

Hennessy Advisors is the investment advisor to the Hennessy Funds, a family of U.S. mutual funds and an ETF. Almost all of its revenue is a fee charged as a percentage of the assets it manages, at annual rates between 0.40% and 1.25% depending on the fund, so earnings rise and fall with those assets. Assets move for three reasons: investors buying in, investors redeeming, and stock market movements. The business is concentrated: in fiscal 2025 (year ended September 30) the Hennessy Cornerstone Mid Cap 30 Fund produced 33% of revenue, the Focus Fund 16%, Cornerstone Growth 12%, Japan 10% and Gas Utility 7%, so five funds produced about 78%. The Focus Fund also pays a 0.29% fee to its sub-advisor out of its 0.90% fee, so it is less profitable than its revenue share suggests. The company has grown largely by buying the management of other advisors' funds since 2002. How it has performed. Revenue fell from $51.4 million in fiscal 2016 to $29.6 million in fiscal 2024, rebounded to $35.5 million in fiscal 2025 as average fund assets rose 21.6% to $4.5 billion, and was $24.8 million in the first nine months of fiscal 2026, down 8% from a year earlier (the June 2026 quarter, at $8.4 million, was 4% above a year earlier). Over the decade, despite acquisitions and a strong U.S. stock market, the fee base has shrunk. That record, not a hoped-for turnaround, is the backbone of this valuation. How we measure cash earnings. We start from operating cash flow, remove swings in working capital, subtract stock-based pay as a real cost, and subtract the small capital spending needed to maintain the business (under 1% of revenue). To value the operating business separately from its balance sheet, we add back interest paid on its notes and remove the after-tax interest earned on its cash, because the cash is credited directly below. On that basis the business produced about $1.70 per share in fiscal 2019, $1.29 in 2020, $1.18 in 2021, $1.21 in 2022, $0.83 in 2023, $1.06 in 2024 and $1.41 in 2025; the first nine months of fiscal 2026 ran at roughly $1.26 a year. We anchor on $1.21, the median of fiscal 2019 through 2025, a window that runs from the end of the 2018 peak through the 2023 trough and the partial recovery, a full cycle for this business. Fiscal 2016 to 2018 are left out because the firm then managed far more money. Cash earnings grew about 33% in fiscal 2025, but the base case assumes no growth in year one, because the current nine-month pace is already below fiscal 2025 and nothing in the filings points to a renewed rise. The $82.3 million of acquired fund management contracts on the balance sheet is not amortized and costs no cash; its value is carried only in the earnings path, which declines over time. What the company owes. During the nine months to June 30, 2026 Hennessy repaid all $40.25 million of its notes from cash on hand and now has no borrowings. It held $35.4 million of cash at June 30, 2026. We treat about $5 million as needed to run the business and credit the remaining $30.4 million, about $3.78 per share, in every case. Leases, taxes and accrued bonuses are already paid for in cash earnings and are not subtracted again. Base case, $17.96 per share. Cash earnings hold at $1.21 per share for three years, then decline 3% a year indefinitely, roughly the pace at which the fee base has actually shrunk over the past decade as active mutual funds lose money to index products, partly offset by the company's habit of buying small fund families. The operating business is worth about $114.0 million, it owes nothing, and with $30.4 million of surplus cash the shares are worth about $144.4 million, or $17.96 each. No growth is credited: acquisitions have been too small and irregular recently to count as a repeatable engine, and inflows are not in hand. Bear case, $11.49 per share. A stock-market downturn of the 2008-2009 kind hits a business whose fees are tied directly to equity fund values and whose costs are largely fixed. Cash earnings fall to $1.05 in year one and $0.60 in year two, deeper than the fiscal 2023 trough of $0.83, which followed a much milder 2022 decline. They recover only to $0.70 and $0.80 because the Mid Cap 30 Fund, a third of revenue, suffers redemptions like those after 2018, then shrink 6% a year. The business is worth about $62.0 million, it owes nothing, and with the surplus cash the shares are worth about $92.3 million, or $11.49 each. With no debt, a weak stretch cannot force a refinancing; the risk is lost fee income, not lenders. Bull case, $22.25 per share. Cash earnings of $1.30 per share, between the current pace and fiscal 2025, hold for fifteen years, reflecting the fund family's record of keeping assets in a range since its 2012 FBR acquisition with small acquisitions offsetting outflows; after that they decline 3% a year. The business is worth about $148.5 million and the shares about $178.8 million, or $22.25 each. We do not credit a return to fiscal 2018 earnings of about $2.28 per share, which would need acquisitions or inflows far larger than anything achieved in the past decade. What changed since our last estimate. Little in the business: no new annual or quarterly report has been filed since our previous review. Our base case is essentially unchanged ($17.98 before, $17.96 now). The bear case is a little lower ($11.98 before, $11.49 now) because it now includes a full equity bear market of the 2008-2009 kind rather than only a repeat of the 2018-2023 redemptions. The bull case is close to unchanged ($22.12 before, $22.25 now). What would make this wrong. On the downside: a rapid exit from the Mid Cap 30 or Focus funds, the retirement of founder and CEO Neil Hennessy, or fund boards cutting advisory fees at contract renewals. On the upside: a sustained period of net new money like fiscal 2024, or a sizeable acquisition actually signed. Margin-of-safety price. We are reasonably sure of the earnings level, since seven years of results cluster between $0.83 and $1.70 per share, but the trend is downward and a third of revenue depends on one fund. The worst plausible outcome is a severe market fall combined with heavy redemptions from Mid Cap 30; with no debt and $3.78 per share of surplus cash, the company would survive it, but earnings could halve for a time. If we are wrong about the decline rate and the depth of a downturn, the shares look worth around the bear figure of $11.49. The company pays a dividend of $0.15 a quarter, about $0.60 a year, which its cash earnings cover roughly twice. From $9.50, with that dividend, the base case implies about 22% a year if the shares reach base value within four years, and the bear case implies about 11% a year if they only reach the bear value in four years, with the cash pile limiting the downside. The margin-of-safety price is $9.50.