Waddell & Reed Reaffirmed Neutral

Zacks

We have reiterated our Neutral recommendation on Waddell & Reed Financial Inc. (NYSE: WDR - News) after a thorough review of its second-quarter 2011 earnings results and continuous improvement in its assets under management (AUM).

Waddell & Reed’s second-quarter 2011 earnings per share were a penny ahead of the Zacks Consensus Estimate. The results in the quarter were primarily aided by higher gross sales across all the company’s revenue channels, improved revenues, growth in AUM, lower redemptions and modest improvement in operating margin. However, these positives were mitigated by higher operating expenses.

Additionally, Waddell & Reed has recorded a surge of 300% in AUM over the last 12 years with about $92 billion in AUM as of June 30, 2011. There were continued strong investment performances behind this growth story. Also, despite unfavorable market and economic conditions, the performance of the company is commendable.

Waddell & Reed has been enhancing shareholders value through dividends and share repurchases. In December 2010, the company had increased its quarterly dividend by 5.3% to 20 cents per share and maintained the same level in the first half of 2011 as well. Further, Waddell & Reed bought back about 958,000 shares at an aggregate cost of $38 million during the first six months of 2011.

On the flip-side, Waddell & Reed’s investment management business faces a large number of regulatory rules that aim to improve mutual fund corporate governance. These changes in rules could suppress the company’s fee revenues, thereby adversely affecting the company’s top-line. 

Furthermore, Waddell & Reed’s balance sheet contains a significant amount of intangibles. With redemptions remaining at an industry low and a significant turmoil in the equity and debt markets, the company’s net inflows and profitability could be negatively impacted.

Waddell & Reed currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Similarly, one of the company’s close competitors, Eaton Vance Corp. (NYSE: EV - News) also retains a Zacks #3 Rank (short-term Hold rating).

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