Federated Investors Inc. (FII) reported second-quarter 2014 earnings per share of 35 cents, in line with the Zacks Consensus Estimate. Further, this compared unfavorably with the prior-year quarter earnings of 39 cents.
Decrease in expenses and record higher equity assets acted as the tailwinds for the quarter. However, lower top-line performance and decline in assets under management (AUM) were on the downside.
Net income came in at $36.9 million compared with $40.4 million in the prior-year quarter.
Performance in Detail
Total revenue decreased 5% year over year to $213 million. The reported revenues were also below the Zacks Consensus Estimate of $216 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 7% year-over-year fall and stood at $137.6 million.
During the reported quarter, Federated derived 32% of its revenues from money market assets, 67% from fluctuating assets (44% from equity assets and 23% from fixed-income assets) and the remaining 1% from other products and services.
Total operating expenses decreased 2% on a year-over-year basis to $154.9 million in the quarter. The fall in expenses primarily reflects reduced distribution expenses related to lower average money-market assets and increased fee waivers, partially offset by elevated compensation and related expense along with increased distribution expenses related to higher average equity assets.
Assets Position
As of Jun 30, 2014, total AUM was $351.6 billion, down 3% from $363.8 billion as of Jun 30, 2013. Average managed assets were $358.4 billion, down 4% from $372.9 billion in the prior-year quarter.
At quarter end, equity assets came in at record $49.9 billion, up 29% year over year. Fixed-income assets rose 2% year over year to $51.1 billion.
However, money market assets were $245.2 billion, down 9% on a year-over-year basis. Money market mutual fund assets came in at $212.4 billion, down 9% year over year.
As of Jun 30, 2014, cash and other investments were $263.6 million, down from $292.2 million as of Dec 31, 2013. Total long-term debt was $381.6 million, up from $339.7 million as of Dec 31, 2013.
Capital Deployment Update
In second-quarter 2014, Federated repurchased 213,767 shares of Federated class B common stock for $5.9 million.
Competitive Landscape
Among other investment managers, Janus Capital Group Inc. (JNS) reported second-quarter 2014 earnings per share attributable to common shareholders of 19 cents, inching past the Zacks Consensus Estimate by a penny, while BlackRock, Inc.’s (BLK) second-quarter adjusted earnings of $4.89 per share significantly surpassed the Zacks Consensus Estimate of $4.46 for the third consecutive quarter. Invesco Ltd. (IVZ) is scheduled to release results on Jul 31.
Our Viewpoint
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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