Following disappointing first-quarter 2014 results, shares of Federated Investors Inc. (FII) declined around 1.0% in the after-hours trade on Thursday. Impacted by lower revenues, the company reported first-quarter earnings per share of 34 cents, which missed the Zacks Consensus Estimate by 3 cents. Moreover, this compared unfavorably with the prior-year quarter earnings of 41 cents.
Our proven model predicted that Federated may not post an earnings beat as it did not have the right combination of two key ingredients – positive Earnings ESP and a Zacks Rank #3 (Hold) or higher. It had a Zacks Rank #3 (Hold), but a negative Earnings ESP.
Lower-than-expected results were impacted by a decline in the top line. Moreover, the company recorded lower assets under management (AUM) in the quarter. However, decrease in expenses and higher equity assets acted as the tailwinds.
Net income for the quarter under review came in at $35.2 million compared with $43.0 million in the prior-year quarter.
Performance in Detail
Total revenue decreased 7% year over year to $211.5 million. The reported revenues were also below the Zacks Consensus Estimate of $222.0 million.
The decline was due to an upsurge in voluntary fee waivers and reduction in revenue due to lower average money market and fixed-income assets. These negatives were partially offset by increase in revenue due to enhanced average equity assets. Moreover, net investment advisory fees recorded a 10% fall year over year and stood at $135.1 million.
During the reported quarter, Federated derived 34% of its revenues from money market assets, 65% from fluctuating assets (42% from equity assets and 23% from fixed-income assets) and the remaining 1% from other products and services.
Total operating expenses decreased 3% on a year-over-year basis to $154.9 million in the quarter. The fall in expenses primarily reflects reduced distribution expenses, partially offset by elevated compensation and related expense.
Assets Position
As of Mar 31, 2014, total AUM was $366.2 billion, down 3% from $377.3 billion as of Mar 31, 2013. Average managed assets were $374.4 billion, down 2% from $381.2 billion in the prior-year quarter.
At quarter end, fixed-income assets declined 3% year over year to $51 billion. Money market mutual fund assets came in at $227.5 billion, down 6% year over year.
Money market assets in both funds and separate accounts were $263.6 billion, down 6% on a year-over-year basis. However, equity assets came in at $45.9 billion, up 21% year over year.
As of Mar 31, 2014, cash and other investments were $256.7 million, down from $292.2 million as of Dec 31, 2013. Total long-term debt was $316.2 million, down from $339.7 million as of Dec 31, 2013.
Capital Deployment Update
In first-quarter 2014, Federated repurchased 277,971 shares of Federated class B common stock for $7.5 million.
Competitive Landscape
Among other investment managers, Janus Capital Group Inc. (JNS) reported first-quarter 2014 earnings per share attributable to common shareholders of 16 cents, in line with the Zacks Consensus Estimate, while BlackRock, Inc.’s (BLK) first-quarter adjusted earnings of $4.43 per share significantly surpassed the Zacks Consensus Estimate of $4.11. Invesco Ltd. (IVZ) is scheduled to release results on May 1.
Our Viewpoint
After posting encouraging second-half 2013 results, Federated disappointed in the first quarter of 2014. Though the company 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, lower revenues remain a concern. Capital deployment activities are expected to augur well. Moreover, cost-containment measures were reflected in the quarter.
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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