Driven by strong top-line performance, Federated Investors Inc. (FII) reported fourth-quarter 2014 earnings of 39 cents per share, beating the Zacks Consensus Estimate by 2.6%. However, results compared unfavorably with the prior-year quarter earnings of 40 cents per share.
For full-year 2014, earnings per share came in at $1.48, beating the Zacks Consensus Estimate of $1.43. However, the figure stood 8.1% below 2013 earnings.
Increased revenues, coupled with record high-equity assets, acted as tailwinds for the quarter. However, higher expenses and decline in assets under management (“AUM”) were the dampeners.
Excluding the income available to unvested restricted shareholders, net income for the quarter came in at $39.6 million or 38 cents per share, compared with $41.1 million or 39 cents per share in the prior-year quarter.
For 2014, excluding the income available to unvested restricted shareholders of $5.8 million, net income amounted to $149.2 million or $1.42 per share, down 8% from the prior-year net income of $162.2 million or $1.55 per share.
Performance in Detail
Total revenue for the fourth quarter inched up 1% year over year to $217.9 million. The reported figure was, however, 1.6% below the Zacks Consensus Estimate of $221.5 million.
Total revenue for 2014 came in at $859.3 million, missing the Zacks Consensus Estimate of $874 million. Moreover, it was 2.2% below the year-ago total.
The upsurge in the fourth-quarter revenue was attributable to a rise in average equity assets under management, partially offset by reduced average money market assets. Moreover, net investment advisory fees recorded a 4% year-over-year increase to $143.6 million, while other net revenue rose 40% to stand at $1.3 million. Further, the quarter witnessed a decline in voluntary fee waivers.
Despite a year over year fall in revenues for 2014, the company witnessed record high net equity sales of $4.3 billion in the year.
During the reported quarter, Federated derived 31% of its revenues from money market assets, 69% from fluctuating assets (46% from equity assets and 23% from fixed-income assets).
Non-operating income (expenses) plummeted nearly 88% year over year to $523 million, primarily due to a fall in gains realized from investments.
Total operating expenses ascended 1% on a year-over-year basis to $156.2 million in the quarter. The rise in expenses primarily reflects elevated compensation and related costs, along with increased office and occupancy, and systems and communication expenses. These were, however, partially offset by a fall in professional fees, travel and related costs, and promotional expenses.
Assets Position
As of Dec 31, 2014, total AUM was $362.9 billion, down 3.5% from $376.1 billion as of Dec 31, 2013. Average managed assets were $351.9 billion, down 3.9% from $366.2 billion in the prior-year quarter.
Money market assets were $258.8 billion, down 6.2% on a year-over-year basis. Money market mutual fund assets came in at $225.5 billion, down 6% year over year.
However, both equity and fixed income assets witnessed increases during the quarter. While equity assets came in at $51.4 billion, up 16.5% year over year; fixed-income assets rose 5.1% year over year to $52.7 billion.
Moreover, as of Dec 31, 2014, cash and other investments were $297.3 million, up from $292.2 million as of Dec 31, 2013. Total long-term debt was $377.8 million, up from $339.7 million as of Dec 31, 2013.
Capital Deployment Update
In fourth-quarter 2014, Federated repurchased 200,000 shares of Federated class B common stock for $6.2 million.
Competitive Landscape
Among other investment managers, BlackRock, Inc. (BLK) reported fourth-quarter adjusted earnings of $4.82 per share, surpassing the Zacks Consensus Estimate of $4.68 for the fifth consecutive quarter. Ameriprise Financial, Inc. (AMP) and Invesco Ltd. (IVZ) are scheduled to release fourth-quarter and full year earnings results on Jan 28 and Jan 29, respectively.
Our Viewpoint
Federated exhibits substantial growth potential, given its diverse asset and product mix, coupled with a strong liquidity position. However, declining assets under management could pose a major threat to its financials.
Nevertheless, strategic acquisitions are expected to augur well for the company. These apart, prudent cost-control measures will provide the company with a competitive edge over its peers. Thus, Federated continues to be a sound asset for yield-seeking investors.
Despite the positives, stringent regulations, sluggish economy and the prevalent low interest rate environment are anticipated to continue exerting pressure on the company’s earnings.
Currently, Federated carries a Zacks Rank #2 (Buy).
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