We are upgrading our recommendation on Franklin Resources Inc. (BEN) to Outperform from Neutral, based on its impressive earnings performance and improving market sentiments. The results outpaced the Zacks Consensus Estimate and were ahead of the prior-year quarter as well as prior quarter’s earnings.
In May, Franklin’s reported fiscal second-quarter 2012 earnings of $2.32 per share were much above the Zacks Consensus Estimate of $2.23 per share. Moreover, the results outpaced earnings of $2.20 reported in the prior quarter and $2.25 in the prior-year quarter. Results improved due to higher top-line growth. Increased AUM was also positive for the quarter. Higher operating expenses were, however, the dampeners.
Last week, Franklin reported preliminary assets under management (AUM) of $$726.4 billion by its subsidiaries for the end of April 2012. Results witnessed a slight rise from $725.7 billion as of March 31, 2012 and a minor fall of 0.9% from $733.1 billion as of April 30, 2011.
Among Franklin’s peers – Invesco Ltd. (IVZ) announced a marginal 0.7% decline in its preliminary month-end AUM for the month of April 2012. The company’s AUM for the reported month was $668.4 billion compared with $672.8 billion at the end of March 2012. The decline in Invesco’s April AUM was a result of total net outflows and market depreciation, offsetting inflows of $2.3 billion from foreign exchange.
During the first half of fiscal 2012, market returns improved, following the volatility and negative sentiments in the global financial markets throughout the fourth quarter of fiscal 2011. Based on the expected stabilization of legislative initiatives and other successful efforts along with liquidity in the financial markets, Franklin, with modifications in business, strategies and operation, is anticipated to continue gaining from further economic recovery.
Franklin is growing strategically and is productively strengthening its foothold in the market. During the course of the calendar year 2011, it completed a number of transactions. These acquisitions enable Franklin to diversify product offerings in key markets and mark its presence internationally. Therefore, we expect Franklin to benefit from the growth potentials of these transactions.
Franklin stands healthy from the balance sheet perspective as well. For the past six years, it has been constantly increasing its dividend. Besides, the company also enhanced shareholders’ value by returning over $6.7 billion to them through dividends and repurchases over the past five years, including more than $0.2 billion in the second-quarter fiscal 2012.
On the flip side, Franklin’s increasing focus on international markets for investment products has led to an enhancement in exchange rate and other risks in connection with earnings and income generated from overseas operations. An improved economic data, such as growing consumer spending and comparatively lower unemployment, signifies buoyancy. Yet, the economy has been experiencing much less momentum in the first half of calendar year 2012 than what was anticipated earlier. Consequently, increased challenges would have to be confronted.
A strong balance sheet and recently completed acquisitions are expected to boost the upcoming financial results of the company, though the regulatory restrictions and turbulence in global markets, along with the sluggish economic recovery, could mar the AUM growth while increasing its costs.
Franklin currently 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
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