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Should You Bet on Federated Hermes' Rebound?

GuruFocus.com
·3 min read

- By Nicholas Kitonyi

Asset Management company Federated Hermes Inc. (NYSE:FHI) reported its fiscal third-quarter results on Friday after the closing bell. The company's revenue and earnings beat consensus Street estimates after posting year-over-year growth.

Should You Bet on Federated Hermes' Rebound?
Should You Bet on Federated Hermes' Rebound?


Shares of the company gained more than 5% on Friday, but are still down more than 27% this year. The Pennsylvania-based investment management firm's stock is currently trading several levels below the Peter Lynch earnings line, which indicates possible undervaluation.

Highlights from recent quarterly results

In the company's most recent quarterly results, Federated Hermes posted earnings per share of 85 cents, up 18% from the same period a year ago. Analysts were estimating earnings of 71 cents per share.

Revenue for the period grew 7.1% year over year to $364.5 million, topping the consensus analyst expectation of $356.6 million.

Federated Hermes' total assets under management grew 17% from the prior-year quarter to $614.8 billion. Sequentially, the company's AUM eased 2% down from $628.8 billion reported at the end of the second quarter

President and CEO J. Christopher Donahue noted the company's third quarter saw increased investor interest in managed assets amid a rise in market volatility. The company's "equity assets were at $80 billion, with strong investment performance from our international dividend strategy and both an emerging market equity and an international growth equity fund," he said.

Valuation

From a valuation perspective, shares of Federated Hermes are currently valued at a price-earnings ratio of about 8.03. This puts the share price below the Peter Lynch earnings line of 15. In comparison, fellow U.S. investment management firm Eaton Vance Corp. (NYSE:EV) trades at a trailing price-earnings ratio of 23.96.

On the other hand, Baltimore-based T. Rowe Price Group Inc.'s (NASDAQ:TROW) shares trade at a price-earnings ratio of 14.19 while BlackRock Inc. (NYSE:BLK) is priced at 21.10 times earnings. Invesco Ltd. (NYSE:IVZ), which trades at a price-earnings ratio of 12.24, is the closest to Federated Hermes in terms of valuation.

However, when we factor in expected earnings growth for the next five years, Federated's current PEG ratio of 3.18 looks less competitive when compared to its peers. BlackRock trades at a PEG ratio of 2.30, while T. Rowe Price is valued at 2.67. On the other hand, Eaton Vance's equivalent is 3.07, while Invesco has no earnings estimate for the five-year period.

Conclusion

In summary, Federated Hermes appears to be significantly undervalued based on the Peter Lynch earnings line. The company's short-term valuation also looks very competitive compared to industry peers. However, when we factor in long-term growth, it does not look as impressive. Therefore, the company's recent rebound may be a temporary reaction with long-term upside relatively limited.

Disclosure: No positions in the stocks mentioned.

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This article first appeared on GuruFocus.