Should You Sell Waddell & Reed Post Weak Q3 Earnings?
We issued an updated research report on Waddell & Reed Financial, Inc. WDR on Nov 9, 2015. Shares of this asset manager have gained over 7% following a positive earnings surprise in the third quarter of 2015 (on Oct 27). However, notable deterioration in earnings during the quarter makes us apprehensive about the company’s near-term prospects.
Waddell & Reed’s third-quarter adjusted earnings of 76 cents per share fell 20% year over year, primarily due to a 24% decline in gross sales. This was because recent weakness in the capital markets considerably affected the company’s assets under management (“AUM”), which fell 18% year over year.
We believe lower AUM will lead to a challenging growth environment for the company in the subsequent quarters.
Nonetheless, lower underwriting and distribution expenses, and compensation and related costs resulted in reduced expenses during the quarter, which acted as a major tailwind.
For the fourth quarter of 2015, compensation expenses are projected to come within $47–$52 million, while G&A costs are predicted within $25–$28 million. Further, management expects IT spending to pick up in the upcoming quarter. Such guidance indicates a sequential rise in expenses, and thereby raises concerns over further deterioration in the bottom line during the fourth quarter.
Nonetheless, the company continued with its annual tradition of raising dividend since 2010. Notably, the company hiked its quarterly dividend by 7% to 46 cents per share in Oct 2015, reflecting an attractive annualized dividend yield of 4.4% (based on yesterday’s closing price of $37.43 per share).
Overall, the company’s activities during the quarter failed to win analysts’ confidence. As a result, the Zacks Consensus Estimate for 2015 has declined 3.9% to $2.99 per share, while that for 2016 has fallen 8.9% to $2.85.
Waddell & Reed currently holds a Zacks Rank #4 (Sell).
Stocks Worth a Look
Investors interested in the same industry can consider better-ranked investment bankers like Monroe Capital Corporation MRCC, Monroe Capital Corporation MRCC and Northstar Asset Management Group Inc. NSAM. All these stocks carry a Zacks Rank #2 (Buy).
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