We have reiterated our Neutral recommendation on Federated Investors Inc. (FII) backed by the company’s first-quarter 2011 earnings, which were in line with the Zacks Consensus Estimate.
Federated’s first-quarter 2011 earnings came in at 43 cents per share, in line with the Zacks Consensus Estimate, but better than the year-ago quarter’s earnings of 38 cents. However, this compares unfavorably with the earnings of 45 cents recorded 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 amortization of deferred sales commissions. This was partly offset by an increase in operating expenses on a year-over-year basis. Results in the first quarter of 2011 included 11 cents per share after-tax charge for non-recurring legal expenses related to the expected settlement of litigation.
Federated is one of the largest mutual fund managers in the U.S. Its business mix includes products that are found to be functional under diverse market conditions. The company has structured its investment process to meet the requirements of fiduciaries and others, who use its products to satisfy the needs of their customers. Fiduciaries typically have stringent demands regarding portfolio composition, risk and investment performance.
After the evaluation of Federated’s existing liquid assets, expected continuing cash flow from operations, and its ability to obtain additional financing arrangements and issue debt or stock, we also believe that the company will have sufficient liquidity to meet its present as well as reasonably foreseeable cash needs. The company’s cash and marketable securities totaled $317 million as of March 31, 2011.
The expected additional cash flows from operations and availability under present debt facilities will help the company to take advantage of acquisition opportunities when they arise. It will further help to fund related contingent payments, new products, other investments, capital expenditures and debt repayments, coupled with share repurchase and dividend payment.
Further, Federated continues to look for considerable opportunities to crack profitable deals. It intends to further extend its business outside the U.S. as part of its strategy to expand globally, including money market business.
On the flip side, Federated’s decreased AUM has resulted in a negative organic growth in core business as investors are transferring cash from money market funds to higher yielding bank deposits or investments across the fixed income universe and equities.
As of March 31, 2011, approximately 49% of Federated’s total revenue was attributable to money market managed assets compared with 50% in the prior quarter. A significant reduction in money market managed assets due to changes in financial markets, including increases in interest rates over a short period of time, considerable deterioration in investor confidence, prolonged periods of historically low short-term interest rates and resulting fee waivers, could have a material adverse effect on Federated’s results of operations.
Nevertheless, 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 and a diversified asset as well as product mix.
Federated currently retains a Zacks #4 Rank, which translates into a short-term ‘Sell’ rating. The company’s peer – Franklin Resources Inc. (BEN) retains a Zacks#1 Rank (a short-term ‘Strong Buy’ rating).
FRANKLIN RESOUR (BEN): Free Stock Analysis Report
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