Federated Investors Inc. (FII) reported third-quarter 2013 earnings per share of 38 cents, inching past the Zacks Consensus Estimate by a penny. However, this compares unfavorably with the prior-year quarter earnings of 43 cents.
Improved assets under management (AUM) and a strong capital position were the positives for the quarter. However, decline in the top line and elevated level of operating expenses remains concerns.
Including certain non-recurring items, net income for the quarter under review came in at $37.7 million or 36 cents per share compared with $55.8 million or 54 cents per share in the prior-year quarter.
Performance in Detail
Total revenue decreased 11% year over year to $211.9 million. The reported revenues were also below the Zacks Consensus Estimate of $223.0 million. The decline was due to an upsurge in voluntary fee waivers, partially offset by enhanced average equity assets. Moreover, net investment advisory fees recorded a fall of 16% year over year and stood at $134.6 million.
During the reported quarter, Federated derived 36% of its revenues from money market assets, 62% from fluctuating assets (39% from equity assets and 23% from fixed-income assets) and the remaining 2% from other products and services.
Total operating expenses surged 4% on a year-over-year basis to $154.1 million in the quarter. The rise in expenses primarily reflects increased professional services fees, partially mitigated by lower distribution costs.
Assets Position
As of Sep 30, 2013, total AUM was $366.7 billion, up 1% from $364.1 billion as of Sep 30, 2012. Average managed assets were $364.2 billion, up 1% from $361.1 billion in the prior-year quarter.
At quarter end, fixed-income assets declined 3% year over year to record $50 billion. Equity assets came in at $40.3 billion, up 14% year over year.
Money market mutual fund assets came in at $237.9 billion, down 3% year over year. Money market assets in both funds and separate accounts were $270.3 billion, slightly up on a year-over-year basis.
As of Sep 30, 2013, cash and other investments were $350.5 million, up from $258.6 million as of Dec 31, 2012. Total long-term debt was $366.5 million, down from $405.0 million as of Dec 31, 2012.
Capital Deployment Update
In third-quarter 2013, Federated repurchased 60,100 shares of Federated class B common stock for $1.7 million.
Concurrent with the earnings release, the board of Federated declared a quarterly dividend of 25 cents per share. The dividend will be paid on Nov 15, 2013 to shareholders of record as of Nov 8, 2013.
Competitive Landscape
Among other investment managers, Janus Capital Group Inc.’s (JNS) third-quarter 2013 earnings were in line with the Zacks Consensus Estimate, while results at T. Rowe Price Group, Inc. (TROW) and Lazard Ltd. (LAZ) beat the Zacks Consensus Estimate.
Our Viewpoint
We believe Federated has the potential for significant growth in the long run, given its fairly liquid balance sheet and a diversified asset as well as product mix. Moreover, investors’ increased demand for the company’s wide range of income-oriented products will aid top-line improvement. Further, capital deployment activities will augur well.
However, persistent regulatory pressures, slow global economic growth and a low-interest rate environment are expected to keep Federated’s earnings under pressure in the upcoming quarters. Shares of Federated currently carry a Zacks Rank #3 (Hold).
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