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A month has gone by since the last earnings report for Federated Investors, Inc. FII. Shares have lost about 5.1% in the past month, underperforming the market.
Will the recent negative trend continue leading up to its next earnings release, or is FII 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 drivers.
Federated Q4 Earnings Beat, Revenues & Costs Decline
Federated pulled off a positive earnings surprise of around 3.4% for fourth quarter 2017, keeping the earnings beat streak alive.
Adjusted earnings per share of 61 cents beat the Zacks Consensus Estimate by 2 cents and also improved 17% year over year from 52 cents. Results exclude tax benefits of $70.4 million or 70 cents per share related to the tax reform.
Including tax benefits, net income for the quarter came in at $131.8 million or $1.31 per share compared with $55.8 million or 52 cents reported in the year-ago quarter.
Results were chiefly backed by lower expenses, driven by reduced voluntary fee waivers. Also, AUM improved during the quarter. However, lower revenues remained the undermining factor.
For full-year 2017, adjusted net income was $220.9 million or $2.18 per share, up from $208.9 million or $2.03 per share in the prior year.
Downtrend in Revenues, Costs Down
For 2017, total revenues came in at $1.1 billion, down 4% year over year.
Total revenues in the fourth quarter declined 4% year over year to $278.3 million. Moreover, the figure missed the Zacks Consensus Estimate of $284 million.
The year-over-year decline in revenues was mainly due to the change in a customer relationship and altered average money market assets mix. This was partially mitigated by decreased voluntary fee waivers related to certain money market funds and increased revenues resulting from higher average equity and fixed-income assets.
Also, net investment advisory fees dropped 5% year over year to $186.1 million. In addition, net service fees (other) marked a 1% decrease, amounting to $43.1 million. Further, administrative service fees were down 5% year over year to $49.1 million.
During the reported quarter, Federated derived 40% of its revenues from money market assets, and remaining 60% from equity and fixed-income assets.
Furthermore, supported by a rise in net investment income, the company recorded a spectacular improvement in non-operating income of $2.4 million in the quarter, significantly up year over year.
Total operating expenses declined 9% year over year to $187.5 million. The fall primarily exhibits a decline in distribution expenses associated with a change in a customer relationship and reduced average money market fund assets, partially mitigated by increased distribution expenses related to lower voluntary yield-related fee waivers.
Steady Asset Position
As of Dec 31, 2017, total AUM was $397.6 billion, up 9% year over year. Average managed assets were $382 billion, up 7% from the prior-year quarter.
Federated witnessed equity assets of $68.1 billion, up 9% year over year. Additionally, fixed-income assets grew 25% year over year to $64.2 billion.
Additionally, money market assets increased 5% year over year to $265.2 billion. However, money market mutual fund assets came in at $185.5 billion, down 10% year over year.
As of Dec 31, 2017, cash and other investments were $369.5 million and total long-term debt totaled $170 million compared with $301.1 million and $165.8 million, respectively, as of Dec 31, 2016.
Capital Deployment Update
For 2017, Federated repurchased 1.84 million shares of Federated class B common stock for $47 million. Notably, during the fourth quarter, the company repurchased 197,237 shares of Federated class B common stock for $4.6 million.
Management expects compensation and related expenses to be nearly $76 million for the first-quarter 2018 on account of seasonality.
Operating income is expected to decline sequentially in the first quarter on account of lower number of days and expectations of higher compensation related expenses.
In 2018, the effective tax rate is expected to be in the range of 24-25%.
How Have Estimates Been Moving Since Then?
Fresh estimate followed an upward path over the past two months.
Federated Investors, Inc. Price and Consensus
Federated Investors, Inc. Price and Consensus | Federated Investors, Inc. Quote
Currently, FII has a subpar Growth Score of D, however its Momentum is doing a bit better with a C. Charting a somewhat similar path, the stock was also 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.
Our style scores indicate that the stock is more suitable for value investors than momentum investors.
FII has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.
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Federated Investors, Inc. (FII) : Free Stock Analysis Report
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