Franklin Resources Inc.’s (BEN) fourth-quarter 2011 earnings of $1.88 per share were below the Zacks Consensus Estimate of $1.99 per share. Results were affected by higher operating expenses and lower assets under management (AUM).
Moreover, the results lagged earnings of $2.26 per share in the prior quarter, but were ahead of earnings of $1.65 per share in the prior-year quarter.
For fiscal 2011, earnings per share were $8.62 versus $6.33 in the prior year. However, earnings lagged the Zacks Consensus Estimate by 3 cents per share.
Net income was $416.0 million in the quarter compared with $503.3 million in the prior quarter and $372.9 million in the prior-year quarter. For fiscal 2011, net income was $1.9 billion compared with $1.4 billion in the prior year.
Quarterly Performance in Detail
Total operating revenue increased 20.0% year over year to $1.8 billion, primarily driven by higher investment management fees, increased sales and distribution fees and increased shareholder servicing fees. However, revenue was below the Zacks Consensus Estimate of $1.9 billion.
In fourth-quarter 2011, investment management fees increased 27% year over year to $1.2 billion, while sales and distribution fees grew 10% year over year to $580 million. Shareholder servicing fees surged 8% year over year to $75.5 million.
Total operating expenses increased 13% year over year to $1.1 billion, mainly due to an rise in sales, distribution and marketing expenses, information systems and technology expenses, enhanced occupancy and lower general, administrative and other expenses and higher compensation and benefits.
In the fourth quarter of 2011, total AUM was $659.9 billion, down from $734.2 billion as of June 30, 2011, attributed to market depreciation. AUM increased 2% year over year, mainly due to net new flows and from acquisitions, partially offset by market depreciation.
Simple monthly average AUM during the quarter decreased 2.0% sequentially and increased 18.0% year over year to $714.4 billion. At the end of the quarter, net new flows were $3.1 billion versus $21.7 billion in the prior quarter and $19.4 billion in the prior-year quarter.
Balance Sheet Position
As of September 30, 2011, cash and cash equivalents and investments were $9.4 billion compared with $6.8 billion as of September 30, 2010, while total stockholders' equity was $9.1 billion versus $7.7 billion as of September 30, 2010.
During the reported quarter, Franklin repurchased 3.1 million shares of its common stock for a total cost of $337.1 million. As of September 30, 2011, Franklin had 217.7 million shares of common stock outstanding versus 224.0 million shares as of September 30, 2010.
Competitor Performance
In Franklin’s peer group, Invesco Ltd.’s (IVZ) third-quarter adjusted earnings came in at 42 cents per share, just a cent ahead of the Zacks Consensus Estimate. Though this compares unfavorably with earnings of 44 cents in the prior quarter, it was ahead of prior-year quarter’s earnings of 39 cents.
On a GAAP basis, earnings came in at 36 cents per share compared with 39 cents in the prior quarter and 32 cents in the year-ago quarter. Invesco’s earnings improved over the prior-year quarter primarily on an increase in net revenue, partially offset by higher operating expenses. The company’s assets under management also remained healthy during the quarter.
Our Take
During the course of calendar year 2011, the company entered into a new strategic relationship with (Telegis) Capital Management, acquiring a 20% equity stake. This company’s experience in commodities, managed futures, and hedge fund replication ideally balances the existing alternative offerings of Franklin.
Furthermore, Franklin completed the acquisition of Rensburg Fund Management, a UK equity specialist with about $1.5 billion in AUM in January 2011. The Rensburg acquisition allows the company to diversify product offerings in key markets.
Moreover, Franklin’s acquisition of Balanced Equity Management in July 2011 aims to mark its presence in the Australian market by providing best investment options to satisfy local investors' needs. Therefore, we expect Franklin to benefit from the growth potential of these transactions.
Franklin's global footprint is an exceptionally favorable strategic point, since its AUM is well diversified. Moreover, a strong balance sheet and recently completed acquisitions are expected to strengthen the financials of the company, going forward. However, the regulatory restrictions could mar the AUM growth and increase its costs.
Franklin currently retains its Zacks #4 Rank, which translates into a short-term Sell rating. However, considering the company’s business model and fundamentals, we have a long-term Neutral recommendation on the stock.
FRANKLIN RESOUR (BEN): Free Stock Analysis Report
INVESCO LTD (IVZ): Free Stock Analysis Report
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment