Investment managers’ performance is likely to be affected by uncertainty in several matters prevailing in the markets, such as whether the Fed will further reduce interest rates in 2019, the U.S.-China trade war and lower expectations of GDP growth. Further, margin compression and escalating compliance and technology costs are likely to hurt profits in the near term.
Nevertheless, a strong labor market and decent level of consumer confidence might lend some support. Notably, since 2015 most investment managers have waived off majority of their fees with the higher rates. This decline in fee waivers has aided companies’ top-line growth. Moreover, most asset managers witnessed revenue growth in the second quarter this year, backed by increase in assets under management (AUM).
Performance of equity markets remained favorable during the first half of 2019, as reflected by the nearly 17.2% growth of the S&P 500 Index, which resulted in a higher AUM.
Therefore, we are focusing on two investment managers — Federated Investors FII and Legg Mason LM.
Federated, with a market cap of $3.3 billion, isa publicly-owned investment manager providing services to its clients, and invests in public equity and fixed income markets globally.
Legg Mason, a publicly-owned asset management holding company, provides investment management and related services to company-sponsored mutual funds and other investment vehicles to global, institutional and retail clients. It has a market cap of $3.2 billion.
Currently, Federated sports a Zacks Rank #1 (Strong Buy) while Legg Mason carries a Zacks Rank #2 (Buy), with both having a Value Score of B. Our research shows that stocks with a Value Score of A or B, when combined with a Zacks Rank #1 or 2, offer the best upside potential.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Though both asset managers have similar business trends, deeper research into the financials will help decide which investment option is better.
Both asset managers have outperformed the industry (up 10.8%) so far this year. While shares of Federated have gained 22.3%, Legg Mason’s stock has climbed 47.5%. So, Legg Mason performed better than Federated.
Both companies have been deploying capital in terms of dividend payments to enhance shareholders’ value. Federated has a current dividend yield of 3.33%, while Legg Mason has a dividend yield of 4.25%.
As compared with the industry’s average of 3.39%, shareholders of Legg Mason gain more.
Legg Mason has a debt-to-equity ratio of 0.61 compared with the industry average of 0.46. But Federated, with ratio of 0.26, has an edge over Legg Mason.
Return on Equity (ROE)
ROE is a measure of a company’s efficiency in utilizing shareholders’ funds. ROE for the trailing 12-months for Legg Mason and Federated is 7.24% and 27.29%, respectively compared with the industry’s level of 13.23%. Thus, Federated reinvests its earnings more efficiently.
Earnings Estimate Revisions & Growth Projections
The Zacks Consensus Estimate for 2019 earnings for Federated climbed nearly 3% over the past 30 days. The same for Legg Mason moved 1.4% north for the current fiscal year during the same time frame.
Additionally, Federated’s 2019 earnings are projected to jump 14.22% year over year. For Legg Mason, the Zacks Consensus Estimate is pegged at $3.64 for fiscal 2020, suggesting considerable increase from the year-ago reported figure.
Hence, Legg Mason reflects better earnings growth prospects.
Sales for Federated for the ongoing fiscal year are projected to be up 14.03% year over year to $1.3 billion. For Legg Mason, the Zacks Consensus Estimate is pegged at $2.9 billion for fiscal 2020, implying slight rise.
Therefore, Federated has an edge here.
Our comparative analysis shows that Federated is better positioned than Legg Mason when considering leverage ratio, reinvesting potential and sales growth expectations. Legg Mason wins on price performance, earnings growth expectations and dividend yield.
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