Franklin Beats on Earnings & Rev

Zacks

Franklin Resources Inc.’s (BEN) fiscal second-quarter 2013 earnings reached $2.69 per share, significantly beating the Zacks Consensus Estimate by 21 cents. Moreover, results outpaced earnings of $2.42 in the prior quarter.

Better-than-expected results came on the back of higher revenues. Moreover, increased level of assets under management (:AUM) and a strong capital position were the tailwinds. Yet, higher operating expenses were a dampener.

Net income was $572.8 million in the quarter compared with $516.1 million in the prior quarter.

Performance in Detail

Total operating revenue surged 6% sequentially to $2.01 billion, due to growth in all revenue avenues. Revenue results were also above the Zacks Consensus Estimate of $1.98 billion.

Investment management fees increased 6% sequentially to $1.3 billion, while sales and distribution fees inched up 6% sequentially to $642.7 million. Moreover, shareholder servicing fees surged 3% sequentially to $76.6 million, with other net revenue increasing 15% sequentially to $26.8 million.

Total operating expenses increased 6% sequentially to $1.3 billion. The upsurge mainly resulted from higher sales, distribution and marketing expenses, increased information systems and technology expenses and elevated compensation and benefits. These increases were partially mitigated by lower general, administrative and other expenses and low occupancy expenses.

As of Mar 31, 2013, total AUM was $823.7 billion, up from $781.8 billion as of Dec 31, 2012, driven by market appreciation of $24.5 billion and $18.3 billion of net new flows.

Simple monthly average AUM of $807.3 billion during the quarter climbed 6% sequentially. Net new flows were $18.3 billion versus $0.3 billion in the prior quarter.

Capital Position

As of Mar 31, 2013, cash and cash equivalents along with investments were $8.0 billion compared with $7.6 billion as of Dec 31, 2012. Moreover, total stockholders' equity was $10.1 billion versus $9.5 billion as of Dec 31, 2012.

During the reported quarter, Franklin repurchased 163,000 shares of its common stock for a total cost of $23.3 million.

Our Viewpoint

Franklin's global footprint is an exceptionally favorable strategic point as its AUM is well diversified. The company is also poised to benefit from its strong balance sheet. However, regulatory restrictions and sluggish economic recovery could mar AUM growth and increase costs. Additionally, higher expenses remain a matter of concern.

Shares of Franklin currently carry a Zacks Rank #2 (Buy). Among other investment managers, Virtus Investment Partners, Inc. (VRTS) and Waddell & Reed Financial Inc. (WDR) carry a Zacks Rank #1 (Strong Buy), while BlackRock, Inc. (BLK) carries a Zacks Rank #2 (Buy).

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