Balanced View on Janus Capital
We have reiterated our Neutral recommendation on Janus Capital Group Inc. (JNS) based on the company’s better expense management and healthy capital position. However, declining performance fees is a matter of concern.
The early retirement of debt strengthened the balance sheet, which paved the way for Janus Capital’s Board of Directors to increase the regular quarterly cash dividend by 20% in the first quarter of 2012. Such actions would boost investors’ confidence in the company.
Janus Capital has been striving hard to strengthen its businesses. The company is currently focused on enhancing its fixed income business including trading and investment. It ended 2011 with more than $20 billion in fixed income AUM for the first time in the history of the company. We expect these measures to aid its top-line expansion in the upcoming quarters.
Janus Capital continues to improve its operating leverage by enhancing its organic growth in addition to focusing on reducing expenses and strengthening both fixed and discretionary cost savings. We expect the company’s strategy of achieving growth with operating leverage to boost both the top and bottom-line results and provide a greater foundation to the company’s operations in the future.
On the flip side, majority of the company’s total assets are in equities, which makes it more vulnerable to the volatilities of the equity market. The performance of fundamental equity funds has been volatile over the past few quarters due to fluctuation in sales, as well as overall redemptions. Moreover, outflows increased significantly to $1.9 billion during the first quarter of 2012 compared with $0.5 billion in the previous year, primarily driven by underperformance of fundamental equity and lower demand for active equity strategies. These outflows will affect the company’s financials through lower performance fees, thereby hampering overall growth.
Nevertheless, given its healthy balance sheet and dividend increment, we believe Janus has the potential to outperform its peer group in the long run. The risk-reward profile of Janus Capital is currently balanced and hence, we have reiterated our Neutral recommendation on its shares.
Janus Capital currently retains its Zacks #3 Rank, which translates into a short-term Hold rating. The company’s peer – Cohen & Steers Inc. (CNS) also retains a Zacks #3 Rank.
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