We maintain our Neutral recommendation on Franklin Resources Inc. (BEN) based on detailed analysis of fourth-quarter and fiscal 2011 results. The results came way below the Zacks Consensus Estimate and prior-quarter earnings. However, earnings outpaced the prior-year quarter’s results.
In October, Franklin reported fiscal fourth-quarter 2011 earnings of $1.88 per share, below the Zacks Consensus Estimate of $1.99 per share. Results were negatively impacted by higher operating expenses and lower AUM. Moreover, the results lagged earnings of $2.26 per share in the prior quarter, but were ahead 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 $0.03 per share.
Earlier in November, Franklin reported preliminary assets under management (AUM) of $694.1 billion by its subsidiaries for the end of October 2011. The results were up 5.2% from $659.9 billion as of September 30, 2011 and up 4.5% from $664.3 billion as of October 31, 2010.
Franklin’s closest competitor, Invesco Ltd. (IVZ), reported a rise in month-end AUM for October 2011. Invesco’s AUM for the reported month grew 6.2% to $635.7 billion from $598.4 billion at the end of September 2011. The rise in Invesco’s October AUM was mainly attributable to positive market returns and net inflows. Further, foreign exchange led to a $4.3 billion hike in AUM during the month under review.
In fiscal 2011, overall market returns were mixed. The global economy continued to recover in the first half of the year, but slowed down during the third quarter owing to concerns regarding the sovereign debt crisis in Europe. During the fourth quarter, conditions further deteriorated following the downgrade of the U.S. Treasury debt rating and increased concerns regarding Europe.
However, the company’s economic recovery during the first half of the year appreciably benefited its AUM, fee revenues and operating income. Moreover, if legislative initiatives and other efforts successfully stabilize and add liquidity to the financial markets, Franklin with modification in business, strategies and operations are expected to continue to gain from the economic recovery going forward.
Franklin is growing strategically while strengthening its foothold. During the course of the 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 its 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 stands healthy from a balance sheet perspective. The company has been able to generate positive cash flow even in an increasingly difficult operating environment. The company remains in compliance with the requirements for regulatory ratios.
Franklin has been constantly hiking its dividend for the past six years. In the last five years, the company boosted shareholder value by returning over $6.0 billion to shareholders through dividends and share repurchases, including over $0.9 billion in the fiscal year ended 2011.
On the flip side, Franklin’s increasing focus on international markets for investment products has led to an increased exchange rate and other risks in connection with earnings and income generated overseas. Moreover, Franklin’s investment management and related services are subject to wide and intricate, overlapping and frequently changing rules, regulations and legal interpretations in the countries in which it operates.
Moreover, consolidation in the financial services industry has created stronger competitors for the company, who possess better-quality financial resources and broader distribution channels. New product offerings from prime competitors could affect sales of products, potentially resulting in market share decline, revenue and net income.
Therefore, Franklin is investing in advertising and promotion due to changing business conditions for developing products and for potential new growth opportunities. Due to potential changes in strategic marketing campaigns, the level of advertising and promotion expenditures may increase more rapidly than revenue.
Overall, Franklin's global footprint is an exceptionally favorable strategic attribute, since its AUM is well diversified. Moreover, a strong balance sheet and recently completed acquisitions are expected to boost the financial results of the company. However, the regulatory restrictions and sluggish economic recovery could mar the company’s AUM growth while increasing costs.
Franklincurrently retains its Zacks #3 Rank, which translates into a short-term Hold rating.
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