We are downgrading our recommendation on Federated Investors, Inc. (FII) to Underperform from Neutral based on expected downward pressure on assets under management (AUM), flows and margins. Regulatory
backdrop, waning equity markets and sluggish global economic growth are expected to keep earnings under pressure.
Federated's lowered AUM has resulted in a negative organic growth in the 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. 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.
Federated shares currently trade at 14.7x our 2011 earnings estimate, a 7.5% discount to the industry average. Our six-month target price of $22.00 equates to about 13.5x our earnings estimate for 2011.
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