Franklin Resources Inc.’s (BEN) fiscal third quarter 2012 earnings of $2.12 per share were above the Zacks Consensus Estimate of $2.04 per share. However, results lagged earnings of $2.32 in the prior quarter and $2.26 in the prior-year quarter.
Better-than-expected results were due to lower operating expenses, reflecting prudent expense management by Franklin. But a reduced level of assets under management (AUM) was a headwind in the quarter. Moreover, lower revenues were a dampener.
Net income was $455.3 million in the quarter compared with $503.2 million in the prior quarter and $503.3 million in the prior-year quarter.
Quarterly Performance in Detail
Total operating revenue declined 1% sequentially and 4% year over year to $1.78 billion, primarily due to lower investment management fees and decreased sales and distribution fees, partially offset by elevated other net revenue. Moreover, revenue also lagged the Zacks Consensus Estimate of $1.80 billion.
Investment management fees declined 5% sequentially and 5% year over year to $1.1 billion, while sales and distribution fees fell 3% sequentially and 4% year over year to $569 million. However, shareholder servicing fees inched up 1% sequentially, though it was almost flat on a year-over-year basis.
Total operating expenses decreased 4% sequentially and 3% year over year to $1.1 billion. The decline mainly resulted from lower sales, distribution and marketing expenses and decreased general, administrative and other expenses. However, these declines were partially offset by elevated information systems and technology expenses.
As of June 30, 2012, total AUM was $707.1 billion, down from $725.7 billion as of March 31, 2012, attributable to market depreciation of $22.5 billion, partially offset by net new flows of $4.8 billion. Moreover, AUM decreased 4% on a year-over-year basis, mainly due to market depreciation of $32.0 billion.
Simple monthly average AUM of $710.7 billion during the quarter climbed 1% sequentially but was down 2% year over year. Net new flows were $4.8 billion versus $5.6 billion in the prior quarter and $21.7 billion in the prior-year quarter.
Balance Sheet Position
As of June 30, 2012, cash and cash equivalents along with investments were $9.5 billion, compared with $9.4 billion as of September 30, 2011. Moreover, total stockholders' equity was $9.3 billion versus $9.1 billion as of September 30, 2011.
During the reported quarter, Franklin repurchased 2.7 million shares of its common stock for a total cost of $282 million. As of June 30, 2012, the company had 212.6 million shares of common stock outstanding versus 217.7 million shares as of September 30, 2011.
Peer Performance
In Franklin’s peer group, Invesco Ltd.’s (IVZ) second quarter 2012 adjusted earnings came in at 41 cents per share, marginally missing the Zacks Consensus Estimate of 43 cents. This also compares unfavorably with the adjusted earnings of 44 cents in the previous quarter.
Invesco’s lower-than-expected results were attributable to a drop in net revenue, partly offset by a marginal dip in operating expenses. Moreover, AUM deteriorated slightly while the balance sheet position remained stable during the quarter.
Our Viewpoint
Franklin's global footprint is an exceptionally favorable strategic point as its AUM is well diversified. The company is also poised to benefit from its strong balance sheet. However, regulatory restrictions and sluggish economic recovery could mar the AUM growth and increase costs. Additionally, lower revenues remain a matter of concern.
Shares of Franklin currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the company’s business model and fundamentals, we also maintain a long-term Neutral recommendation on the stock.
FRANKLIN RESOUR (BEN): Free Stock Analysis Report
INVESCO LTD (IVZ): Free Stock Analysis Report
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