We have reiterated our Neutral recommendation on Franklin Resources Inc. (BEN) based on its impressive earnings performance and improved assets under management levels. The results outpaced the Zacks Consensus Estimate.
In October, Franklin reported fiscal fourth-quarter 2012 earnings of $2.31 per share, marginally beating the Zacks Consensus Estimate by a penny. Moreover, results outpaced earnings of $2.12 in the prior quarter. Better-than-expected results came on the back of higher revenues. Moreover, increased level of AUM was a tailwind for the quarter. Yet, higher operating expenses were a dampener.
Earlier in December, Franklin reported preliminary AUM of $768.8 billion by its subsidiaries for the month of November 2012. The company’s results witnessed a rise of 2.0% from $753.9 billion as of October 31, 2012. Moreover, it increased 13.8% from $675.8 billion as of November 30, 2011.
Among Franklin’s peers - Invesco Ltd. (IVZ) also announced a 1.0% rise in its preliminary month-end AUM for the month of November 2012. The company’s AUM for the reported month was $683.8 billion compared with $677.0 billion at the end of October. Favorable market returns and total net inflows were the primary reasons for the rise in AUM.
Franklin is strategically augmenting and expanding its foothold. Recently, the company completed the acquisition of the controlling stake in K2 Advisors Holdings LLC (K2), an independent fund of hedge funds solutions provider. The purchase of K2 will assist Franklin in improving and expanding its alternative investments and multi-asset solutions platforms. Such strategic initiatives would help Franklin in providing world-class investment solutions to its clients and auger well for worldwide expansion.
During fiscal 2012, though global financial markets produced strong positive returns and the markets recovered from the significant volatility and negative sentiment experienced during the fourth quarter of fiscal year 2011, yet it remained volatile throughout the year amid continued investor concerns related to the European sovereign debt crisis and the global economy. Moreover, uncertainties regarding economic stabilization and improvement remain in the foreseeable future.
A strong balance sheet and recently completed acquisitions are expected to boost the upcoming financial results of the company, though the regulatory restrictions and turbulence in global markets, along with the sluggish economic recovery, could mar AUM growth while increasing its costs.
We believe that the risk-reward profile of Franklin is currently balanced and hence, we have reiterated our Neutral recommendation on its shares. However, Franklin currently retains a Zacks #2 Rank, which translates into a short-term Buy rating.
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