Will Higher Expenses Hurt Affiliated Managers’ Q4 Earnings?

Affiliated Managers Group Inc. (AMG) is scheduled to release fourth-quarter and full-year 2014 results on Jan 27, before the market opens.

In the preceding quarter, the company delivered a 1.9% positive earnings surprise, driven by an improvement in top line as well as strong growth in assets under management (“AUM”), partially offset by a rise in operating expenses. Moreover, the company reported earnings beats in all the four trailing quarters, with an average surprise of 6.62%.

Will Affiliated Managers be able to keep its earnings streak alive this quarter? Or it will disappoint? Let us see how things have shaped up for this announcement.

Factors Influencing Q4 Results

In Oct 2014, Affiliated Managers completed a deal to acquire majority stake in Veritas Asset Management LLP for $323.7 million. Further, in Dec 2014, the company announced the completion of its additional investment in AQR Capital Management, LLC. These acquisitions, a strategic fit for the company, will likely boost the revenues for this quarter. However, this will also raise the expenses.

Also, Affiliated Managers expects enhanced top-line growth, driven by excellent long-term performance of its affiliates as well as an increase in global demand for its performance-oriented products.

Further, management estimates the ratio of earnings before interest, taxes, depreciation and amortization (“EBITDA”) contribution at end-of-period AUM at 17 basis points in the upcoming release. This projection comes on the back of assumptions of a moderate rise in performance fees.

Moreover, Affiliated Managers anticipates total interest expenses to be around $22.5 million and amortization expenses to be nearly $29.6 million in this quarter. Also, intangible-related deferred taxes are expected at about $19 million.

Expectations of strong contribution from net client cash flows, although slightly strained by modest contribution from performance fees, drove Affiliated Managers’ guidance for economic net income (“ENI”) to the range of $11.00–$11.60 per share in 2014.

Affiliated Managers’ quarterly activities were inadequate to impress the analysts. Hence, the Zacks Consensus Estimate for the quarter remained unchanged at $3.50 per share over the last 7 days.

Earnings Whispers

Our proven model does not conclusively show that Affiliated Managers is likely to beat the Zacks Consensus Estimate in the fourth quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) for this to happen. Unfortunately, this is not the case here as you can see below.

Zacks ESP: The Earnings ESP for Affiliated Managers is -0.86%. This is because the Most Accurate estimate of $3.47 stands below the Zacks Consensus Estimate of $3.50.

Zacks Rank: Affiliated Managers’ Zacks Rank #1 (Strong Buy) increases the predictive power of ESP. However, we also need to have a positive ESP to be sure of an earnings beat.

Stocks That Warrant a Look

Here are a few finance stocks that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter.

The Earnings ESP for Ameriprise Financial, Inc. (AMP) is +0.45% and it has a Zacks Rank #3. The company is slated to report on Jan 28.

T. Rowe Price Group, Inc. (TROW) has an Earnings ESP of +0.89% and a Zacks Rank #3. It is scheduled to report results on Jan 28.

Lazard Ltd. (LAZ) has an Earnings ESP of +1.91% and holds a Zacks Rank #3. It is expected to report on Feb 5.

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