A month has gone by since the last earnings report for Waddell & Reed Financial (WDR). Shares have lost about 15.1% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Waddell & Reed due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Waddell & Reed Q4 Earnings Beat Estimates, AUM Rises
Waddell & Reed’s fourth-quarter 2019 adjusted earnings per share of 51 cents surpassed the Zacks Consensus Estimate of 42 cents. Also, the bottom line grew 8.5% year over year.
Improvement in AUM balance and strong liquidity position drove results. However, lower revenues and an increase in operating expenses were the undermining factors. Further, all distribution channels witnessed outflows.
Results excluded non-cash charges and severance expenses. After considering these, net income attributable to Waddell & Reed totaled $15.9 million or 23 cents per share, down from $46.5 million or 60 cents per share in the prior-year quarter.
In 2019, adjusted earnings of $1.87 per share beat the consensus estimate of $1.76. However, it declined 16.1% year over year. Net income attributable to Waddell & Reed (GAAP basis) fell 37.4% to $115 million.
Revenues Down, Expenses Rise
Operating revenues for the quarter declined almost 1% year over year to $270.1 million, reflecting lower investment management fees, and shareholder service fees, partly offset by rise in underwriting and distribution fees. However, the figure beat the Zacks Consensus Estimate of $269 million.
In 2019, operating revenues decreased 7.8% to $1.1 billion. It was relatively in line with the consensus estimate.
Gross sales declined 43% year over year to $1.5 billion. Redemptions were $4.9 billion, down from $6.5 billion. Net outflows were $3.4 billion compared with $3.8 billion in the year-ago quarter.
Operating expenses rose 5.9% year over year to $241.2 million. The increase was majorly due to higher general and administrative costs, and marketing and advertising expenses. Adjusted operating expenses increased nearly 1% to $226 million.
Adjusted operating margin was 16.3%, down from 17.5%.
As of Dec 31, 2019, AUM totaled $70 billion, up 6.3% year over year. The quarter witnessed net outflows of $3.6 billion.
As of Dec 31, 2019, the company’s cash and cash equivalents, and investment securities totaled $840 million. Long-term debt was $94.9 million and stockholders’ equity was $808.9 million.
Quarterly Performance of Distribution Channels
At the Unaffiliated channel, gross sales fell 49% year over year to $854 million. Net outflows were $1.4 billion compared with $2.1 billion recorded in the year-ago quarter.
Gross sales at the Institutional channel were $32 million, down 62.4% from the year-ago quarter. The segment witnessed net outflows of $842 million compared with $720 million a year ago.
At the Wealth Management channel, gross sales declined 30.9% year over year to $662 million. Net outflows totaled $1.2 billion, up 18.8%.
Share Repurchase Update
Waddell & Reed bought back 2.3 billion shares for $37.5 million during the quarter.
The company expects controllable expenses to be nearly $420-$425 million.
Compensation and benefits costs are expected to be $250-$252 million, stable year over year. G&A expenses are expected to be $90-$92 million and technology costs are anticipated to be $55 million.
Occupancy costs are expected to decline and be nearly $16-$17 million.
Marketing and advertising expenses are expected to be similar to the 2019 level. Management expects depreciation costs to be in the range of $14-$16 million.
The effective tax rate is expected to be 24-26%.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended upward during the past month. The consensus estimate has shifted 14.55% due to these changes.
Currently, Waddell & Reed has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Waddell & Reed has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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