Federated's Earnings and Rev Lag
Federated Investors Inc. (FII) reported first-quarter 2013 earnings per share of 41 cents, lagging the Zacks Consensus Estimate by a penny. This also compares unfavorably with the prior quarter’s earnings of 44 cents, though it came in line with the year-ago quarter.
Lower-than-expected results were driven by decline in top line, aided by an increase in voluntary fee waivers. However, a rise in fixed income and equity assets were the positives. Moreover, decreased operating expenses reflect prudent expense management.
Net income for the quarter under review came in at $43 million compared with $50 million in the prior quarter and $42 million in the prior-year quarter.
Performance in Detail
Total revenue dipped 1% year over year and 7% sequentially to $228 million. The reported revenues were also below the Zacks Consensus Estimate of $254 million.
The year-over-year decline was due to an upsurge in voluntary fee waivers, partially offset by enhanced average fixed-income and equity assets. Moreover, the sequential decrease reflected a rise in voluntary fee waivers along with lesser days in the quarter, partially mitigated by increased average assets.
During the reported quarter, Federated derived 43% of its revenues from money market assets, 56% from fluctuating assets (33% from equity assets and 23% from fixed-income assets) and the remaining 1% from other products and services.
Total operating expenses declined slightly on a year-over-year basis and dipped 1% sequentially to $160 million in the quarter. The decline in expenses primarily reflects lower distribution costs and decreased travel and related expenses.
Assets Position
As of Mar 31, 2013, total AUM was $377.3 billion, up 4% from $363.6 billion as of Mar 31, 2012 but down 1% from $379.8 billion as of Dec 31, 2012. Average managed assets were $381.2 billion, up 3% from $370.1 billion in the prior-year quarter and up 3% from $368.7 billion in the prior quarter.
At quarter end, fixed-income assets improved 14% year over year and slightly on a sequential basis to record $52.8 billion. Equity assets came in at $37.9 billion, rising 11% year over year and 8% sequentially.
However, money market mutual fund assets came in at $242.7 billion, down 1% year over year and 5% sequentially. Money market assets in both funds and separate accounts were $279.7 billion, down 2% both year over year and sequentially.
As of Mar 31, 2013, cash and other investments were $307 million, up from $259 million as of Dec 31, 2012. Total long-term debt was $401.0 million, down from $405 million as of Dec 31, 2012.
Capital Deployment Update
In first-quarter 2013, Federated repurchased 131,472 shares of Federated class B common stock for $2.7 million.
Concurrent with the earnings release, the board of Federated declared a quarterly dividend of 24 cents per share. The dividend will be paid on May 15, 2013 to shareholders of record as of May 8, 2013.
Our Viewpoint
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 aid top-line improvement.
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). Among other investment managers, Invesco Ltd. (IVZ), Legg Mason Inc. (LM) and Franklin Resources Inc. (BEN) are scheduled to release March quarter-end earnings on Apr 30.
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