Franklin Lags on Q4 Earnings Estimates

Zacks

Franklin Resources Inc.’s (BEN) fiscal fourth-quarter 2013 earnings were 80 cents per share, lagging the Zacks Consensus Estimate of 86 cents. However, results were higher than 77 cents earned in the prior-year quarter.

Franklin’s disappointing results came on the back of higher than anticipated expenses. However, top-line growth and a healthy capital position were the tailwinds.

For fiscal 2013, earnings per share were $3.37 versus $2.98 in the prior year. However, earnings lagged the Zacks Consensus Estimate of $3.43 per share.

Net income was $509.0 million in the quarter, up from $492.1 million in the prior-year quarter. Net income for fiscal 2013 was $2.2 billion compared with $1.9 billion in the prior year.

Performance in Detail

Total operating revenue rose 9% year over year to $1.98 billion, due to growth across all revenue streams. However, revenues were below the Zacks Consensus Estimate of $2.06 billion.

For fiscal 2013, operating revenue rose 14% year over year to $5.07 billion. However, this was below the Zacks Consensus Estimate of $8.06 billion.

Investment management fees increased 13% year over year to $1.3 billion, while sales and distribution fees rose 4% to $604.7 million from the prior-year quarter. Moreover, shareholder servicing fees increased 3% on a year-over-year basis to $75.2 million. However, other net revenue fell 6% year over year to $19.2 million.

Total operating expenses increased 5% year over year to $1.2 billion. The rise was mainly due to increase in sales, distribution and marketing expenses, information systems and technology expenses, compensation and benefits as well as general, administrative and other expenses.

As of Sep 30, 2013, total assets under management (:AUM) was $844.7 billion, up from $749.9 billion as of Sep 30, 2012. Average AUM was $827.8 billion, up 14% year over year. Net new flows were negative $2.7 billion versus positive $2.9 billion in the prior-year quarter.

Capital Position

As of Sep 30, 2013, cash and cash equivalents, along with investments, were $8.6 billion compared with $8.4 billion as of Sep 30, 2012. Moreover, total stockholders' equity was $10.7 billion versus $9.8 billion as of Sep 30, 2012.

During the reported quarter, Franklin repurchased 5.6 million shares of its common stock for a total cost of $264.6 million.

Performance of Peers

Among other investment managers, The Blackstone Group L.P.’s (BX) third-quarter 2013 economic net income (ENI) came in at 56 cents per share, missing the Zacks Consensus Estimate by a penny. However, this compared favorably with ENI of 55 cents recorded in the year-ago period.

Lower-than-expected results were due to a fall in top line, partially offset by lower expenses. However, strong growth in AUM and an improved balance sheet were the tailwinds for the quarter.

Our Viewpoint

Due to its global footprint, Franklin's AUM is well diversified and this is favorable for the company. Franklin is also poised to benefit from its strong balance sheet. However, regulatory restrictions and sluggish economic recovery could limit 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, Legg Mason Inc. (LM) and Invesco Ltd. (IVZ) are scheduled to report results for the quarter ended September on Oct 25 on Oct 31, respectively.

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