Federated Investors Inc. (FII) reported third-quarter 2012 earnings per share (EPS) of 43 cents, marching ahead of the Zacks Consensus Estimate by 2 cents. The earnings also compared favorably with the prior-year quarter’s earnings of 37 cents.
Better-than-expected results were driven by higher top-line growth, aided by decline in voluntary fee waivers. Moreover, a rise in fixed income and equity assets were the positives for the quarter. Yet, results were partially impacted by escalated operating expenses.
Including the recognition of insurance proceeds in the quarter, which reduced pre-tax operating expenses by $17.3 million, net income came in at $55.8 million or 54 cents per share.
Performance in Detail
Total revenue climbed 11% year over year to $238.5 million, driven by a decrease in voluntary fee waivers and enhanced fixed-income and equity assets. Yet, the revenue reported was below the Zacks Consensus Estimate of $242 million.
During the reported quarter, Federated derived 47% of its revenue from money market assets, 52% from fluctuating assets (31% from equity assets and 21% from fixed-income assets) and the remaining 1% from other products and services.
Total operating expenses jumped 1% year over year to $148.4 million in the quarter. The rise in expenses primarily reflects higher distribution costs and increased compensation and related expense.
As of September 30, 2012, total AUM was $364.1 billion, up 4% from $351.7 billion as of September 30, 2011. Average managed assets were $360.9 billion, up 3% from $348.8 billion in the prior-year quarter.
At quarter end, fixed-income assets improved 20% year over year to record $51.4 billion. Equity assets came in at $35.4 billion, rising 26% year over year.
However, money market mutual fund assets were $244.8 billion, marginally down from $245.3 billion in the year-ago quarter. Money market assets in both funds and separate accounts were $269.6 billion, down 1% on a year-over-year basis.
As of September 30, 2012, cash and other investments were $367.8 million, up from $322.3 million at the end of December 2011. Total long-term debt was $415.3 million, down from $429.2 million as of December 31, 2011.
Capital Deployment Update
In the third quarter of 2012, Federated repurchased 152,244 shares of Federated class B common stock for $3.0 million.
Concurrent with the earnings release, the Board of Federated declared a quarterly dividend of 24 cents per share and a special dividend of $1.51 per share. The dividends will be paid on November 15, 2012 to shareholders of record as of November 8, 2012.
However, due to the use of the two-class method for calculating EPS, the special dividend is anticipated to reduce fourth-quarter 2012 EPS by approximately 4 cents and full-year 2012 EPS by about 2 cents.
Developments during the Quarter
In September 2012, Federated and Trustmark Corporation (TRMK) closed a deal under which, Federated acquired assets worth $929 million from Performance Funds Trust, a wing of Trustmark. Increased assets under management furnish Federated with various new fund offerings that would benefit its clients.
This deal marks Federated’s third consecutive completed transaction of acquiring assets since the beginning of 2012. Earlier in September, Federated also acquired money market assets worth $4.4 billion from four Fifth Third money market funds of Fifth Third Asset Management Inc. (:FTAM), the asset management subsidiary of Fifth Third Bancorp (FITB). These assets were merged into four existing Federated money market funds, which have the same investment objectives.
Previously, in April, Federated completed the expansion of its operation in United Kingdom by acquiring London-based Prime Rate Capital Management, LLP from Matrix Group Limited. The firm provides institutional liquidity and fixed-income products. UCITS (Undertakings for Collective Investments in Transferable Securities) products, offered by Prime Rate, include Prime Rate Sterling Liquidity Fund, Prime Rate Euro Liquidity Fund and Prime Rate US Dollar Liquidity Fund.
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 help it bolster profitability.
However, persistent regulatory pressures, slow global economic growth and a low-interest rate environment is expected keep Federated’s earnings under pressure in the upcoming quarters.
Shares of Federated currently retain a Zacks #2 Rank, which translates into a short-term Buy rating. However, considering the fundamentals, we maintain a ‘Neutral’ recommendation on the stock.
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