Federated Investors Inc. (FII) reported first-quarter 2011 earnings per share of 43 cents, in line with the Zacks Consensus Estimate, outpacing the year-ago earnings of 38 cents. However, the reported earnings were below 45 cents per share reported in the prior quarter.
Results reflected a rise in fixed income and equity assets, increased top-line growth, decrease in voluntary fee waivers, higher assets under management (AUM) and a decline in the amortization of deferred sales commissions. This was partly offset by an increase in operating expenses on a year-over-year basis.
During the first quarter of 2011, results included 11 cents per diluted share after-tax charge for non-recurring legal expenses related to the expected settlement of litigation.
Performance in Detail
Total revenue increased 3% year over year, but decreased 3% from the prior quarter to $238.9 million and was below the Zacks Consensus Estimate of $256.0 million. The sequential decrease was primarily attributable to an increase in voluntary fee waivers, partially offset by a surge in higher revenue related to average money market and equity assets.
On the other hand, the year-over-year increase in revenue reflects decline in voluntary fee waivers and an increase in average fixed-income and equity assets, partially offset by the impact of lower average money market assets.
During the reported quarter, Federated derived 49% of its revenue from money market assets, 50% from fluctuating assets (32% from equity assets and 18% from fixed-income assets) and 1% from other products and services.
Total operating expenses increased 13% year over year to $182.4 million, primarily reflecting higher professional services fees related to non-recurring legal expenses.
Assets Position
As of March 31, 2011, total AUM was $354.9 billion, up 1% from $349.9 billion as of March 31, 2010 and down 1% from $358.2 billion reported as of December 31, 2010. Average managed assets were $356.3 billion, down from $366.9 billion in the year-ago quarter and up from $345.7 billion in the prior quarter.
At quarter end, fixed-income assets increased 18% year over year and 3% to $41.8 billion from the prior-year quarter. Equity assets came in at $31.6 billion, up 5% year over year and 3% from the prior quarter. However, money market assets in both funds and separate accounts inched down 1% year over year and 2% to $271.1 billion from the prior quarter. Money market mutual fund assets were $239.0 billion in the quarter, down 1% year over year and 2% sequentially.
As of March 31, 2011, cash and other short-term investments were $317.5 million, up from $333.6 million at the end of December 31, 2010. However, total long-term debt was $353.0 million, down from $365.6 million at the end of December 31, 2010.
Share Repurchase and Dividend Update
During the reported quarter, Federated Investors purchased 110,300 shares of Federated Class B common stock for $2.9 million.
The board of Federated Investors declared a quarterly dividend of 24 cents per share, payable on May 13, 2011 to shareholders of record as of May 6, 2011.
Competitor Performance
Federated’s closest competitor, BlackRock Inc.’s (BLK) first-quarter 2011 operating earnings of $2.96 per share substantially exceeded the Zacks Consensus Estimate of $2.75. Although it compared unfavorably with the prior quarter’s earnings of $3.42, it was ahead of prior-year quarter’s earnings of $2.40. Operating results for the quarter excluded expense associated with certain LTIP awards and deferred compensation plans. Compared with the prior-year quarter, better-than-expected results were attributable to strong top-line growth and improved equity markets, partially offset by higher operating expenses.
Our Take
Federated is in a restructuring and recovering phase and the bumps created by the recession in the ride are justified at the moment. Nevertheless, the near-term outlook remains cautious and we wait for a strong and steady rebound that will help to increase market activity and regenerate client demand. Overall, the company has the potential for substantial growth in the long run, given its fairly healthy balance sheet, cost-cutting initiatives and a diversified asset and product mix.
Federated currently retains its Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Considering the fundamentals, we are maintaining our ‘Neutral’ recommendation on the stock.
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