A month has gone by since the last earnings report for Federated Hermes (FHI). Shares have lost about 2.8% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Federated Hermes due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Federated Q1 Earnings Lag Estimates on Higher Expenses
Federated reported first-quarter 2020 earnings per share of 63 cents that lagged the Zacks Consensus Estimate of 70 cents. However, the figure compared favorably with the prior-year quarter earnings of 54 cents.
First-quarter results reflected elevated non-operating expenses, marred by the coronavirus outbreak. However, higher revenues and improved AUM were positives. Also, the company’s liquidity position was strong.
Net income was $64.2 million compared with $54.5 million in the year-ago quarter.
Revenues Climb on Higher AUM, Costs Escalate
First-quarter total revenues climbed 17% year over year to $359.2 million. Also, the top line surpassed the Zacks Consensus Estimate of $351 million. Top-line growth mainly stemmed from higher average money market and equity assets.
Also, net investment advisory fees jumped 14% year over year to $240.7 million. In addition, administrative service fees grew 33% to $72.2 million. Further, net service fees (other) jumped 11% to $46.3 million.
During the first quarter, Federated derived 43% of its revenues from money-market assets, 51% from equity and fixed-income assets, 5% from alternative/private markets and multi asset, and the remaining 1% from sources other than managed assets.
Due to the impacts of the coronavirus outbreak on the market value of investments, the company recorded non-operating expenses of $7 million in the quarter against income of $1.6 million a year ago.
Total operating expenses escalated 13% year over year to $266.4 million. The rise was primarily due to higher distribution, systems and communications, and compensation and professional fees.
Asset Position Steady
As of Mar 31, 2020, total AUM was a record $605.8 billion — up 25% year over year. Average managed assets were $580.2 billion, up 22%.
Federated witnessed money-market assets of $451.3 billion, up 42% from the year-ago period. Further, fixed-income assets grew 1% year over year to $64.7 billion.
Nevertheless, equity assets of $68.2 billion declined 15% year over year. Also, multi-assets decreased 18% to $3.5 billion.
As of Mar 31, 2020, cash and other investments were $381 million and total long-term debt was $195 million compared with $340.6 million and $100 million, respectively, as of Dec 31, 2019.
Assuming asset levels and mix remain constant, and based on recent and expected market conditions, voluntary yield-related fee waivers for the second quarter of 2020 is expected to result in a negative pre-tax impact on income of nearly $3 million.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended upward during the past month. The consensus estimate has shifted 14.19% due to these changes.
Currently, Federated Hermes has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. 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, Federated Hermes has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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