Federated Investors Inc.(FII) reported third-quarter 2011 earnings per share of 37 cents, in line with the Zacks Consensus Estimate, and below the year-ago earnings of 42 cents. Moreover, the reported earnings were below 41 cents per share reported in the prior quarter.
Results reflected decreased top-line growth, increase in voluntary fee waivers, and reduced equity assets. This was partly offset by a rise in fixed income and money market assets, higher assets under management (AUM) and a decline in total operating expenses.
Performance in Detail
Total revenue plunged 12% year over year to $214.0 million and was below the Zacks Consensus Estimate of $230.0 million. The decline was primarily attributable to an increase in voluntary fee waivers, partially offset by a surge in higher revenue related to average money market, fixed-income and equity assets. Moreover, revenue slipped 5% sequentially, owing to an increase in voluntary fee waivers and lower average equity assets.
During the reported quarter, Federated derived 44% of its revenue from money market assets, 55% from fluctuating assets (33% from equity assets and 22% from fixed-income assets) and 1% from other products and services.
Total operating expenses plummeted 12% year over year and 4% sequentially to $147.0 million, primarily reflecting lower distribution fees.
Assets Position
As of September 30, 2011, total AUM was $351.7 billion, up 3% from $341.3 billion as of September 30, 2010 and up 1% from $349.4 billion reported as of June 30, 2011. Average managed assets were $348.8 billion, up from $338.6 billion in the year-ago quarter and down from $354.2 billion in the prior quarter.
At quarter end, fixed-income assets increased 7% year over year and 1% sequentially to $42.9 billion. Equity assets came in at $28.0 billion, down 4% year over year and 11% from the prior quarter. Further, money market assets in both funds and separate accounts climbed 4% year over year and 2% sequentially to $271.7 billion. Money market mutual fund assets were $245.3 billion in the quarter, up 5% year over year and 4% sequentially.
As of September 30, 2011, cash and other investments were $322.2 million, up from $294.1 million at the end of June 30, 2011. However, total long-term debt was $428.4 million, down from $435.0 million at the end of June 30, 2011.
Share Repurchase and Dividend Update
During the reported quarter, Federated Investors purchased 530,133 shares of Federated Class B common stock worth $8.8 million.
The board of Federated Investors declared a quarterly dividend of 24 cents per share, payable on November 15, 2011 to shareholders of record as of November 8, 2011.
Competitor Performance
Federated’s closest competitor, The Blackstone Group (BX) reported third-quarter 2011 economic net loss of 31 cents per share, way below the Zacks Consensus Estimate of 5 cents and the prior-year quarter’s economic net income (ENI) of 31 cents. Blackstone’s results were severely impacted by negative revenues due to sluggish equity markets. However, growth in AUM and lower operating expenses were the positives.
Our Take
We expect regulatory backdrop, waning equity markets and sluggish global economic growth to keep earnings under pressure. However, Federated has the potential for substantial growth in the long run, given its fairly healthy balance sheet and a diversified asset as well as product mix. Nevertheless, the near-term outlook remains cautious and we are expecting a strong and steady rebound that will help to increase market activity and regenerate client demand.
Federated currently retains its Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.
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