It has been about a month since the last earnings report for Franklin Resources (BEN). Shares have lost about 20.3% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Franklin Resources 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.
Franklin's Q3 Earnings Beat Estimates, AUM Declines
Franklin reported a positive earnings surprise of 3.2% in third-quarter fiscal 2019 (ended Jun 30). Adjusted earnings of 65 cents per share outpaced the Zacks Consensus Estimate of 63 cents. Results, however, compare unfavorably with earnings of 75 cents per share recorded in the prior-year quarter.
The company’s results reflected a strong capital position. However, escalating expenses, lower revenues and reduced AUM were recorded. Further, net outflows were also an undermining factor.
Including certain one-time items, net income was $245.9 million or 48 cents per share compared with the $402 million or 75 cents in the prior-year quarter.
Operating income was $374.9 million in the reported quarter compared with the prior-year quarter’s $503.1 million.
Lower Revenues Recorded, Costs Up
Total operating revenues decreased 5% year over year to $1.48 billion in the fiscal third quarter, mainly due to lower investment management and other fees, sales along with distribution fees, shareholder-servicing fees, partly muted by higher other revenues. The figure comes almost in line with the Zacks Consensus Estimate.
Investment management fees declined 5% year over year to $1.02 billion, while sales and distribution fees were down 6% year over year to $367.5 million. Additionally, shareholder-servicing fees dipped 2% on a year-over-year basis to $52.7 million, while other net revenues jumped 5% year over year to $37.1 million.
Total operating expenses flared up 4% year over year to $1.1 billion. This upside resulted from higher compensation and benefits, occupancy as well as technology expenses, partly mitigated by lower sales, distribution and marketing, along with general, administrative and other expenses.
As of Jun 30, 2019, total AUM came in at $715.2 billion, down 1% from $724.1 billion as of Jun 30, 2018. Notably, the quarter recorded net new outflows of $5.4 billion. Simple monthly average AUM of $710.8 billion slipped 3%, year on year.
Steady Capital Position
As of Jun 30, 2019, cash and cash equivalents, along with investments were $7.1 billion, compared with $8 billion as of Sep 30, 2018. Furthermore, total stockholders' equity was $10.6 billion compared with $10.2 billion as of Sep 30, 2018.
During the June-end quarter, the company repurchased 3.6 million shares of its common stock at a total cost of $121.3 million.
Management expects to incur additional expenses of around $15 million during the fiscal fourth quarter related to increase in termination benefits and implementation of additional cost structure and business optimization initiatives. Additional acquisition-related retention expenses of about $20 million during the fourth quarter, $80 million during the fiscal year ending Sep 30, 2020, and amounts that decrease by about $10 million per year in the following four fiscal years is also anticipated.
Fiscal fourth quarter tax rate is expected to be between 22% and 22.5%. Further, full year 2019 tax rate is likely to be between 26.5% and 27%.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates review.
Currently, Franklin Resources has a poor Growth Score of F, however its Momentum Score is doing a lot better with an A. 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 broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Franklin Resources has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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