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Why Is Waddell & Reed (WDR) Down 11% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for Waddell & Reed Financial (WDR). Shares have lost about 11% 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 drivers.

Waddell & Reed Beats on Q2 Earnings as Expenses Fall

Waddell & Reed’s second-quarter 2019 adjusted earnings of 42 cents per share outpaced the Zacks Consensus Estimate of 37 cents. However, the bottom line was down 24% year over year.

Results benefited from decline in expenses. However, fall in AUM and lower revenues were major headwinds. Further, all distribution channels witnessed outflows.

Net income attributable to Waddell & Reed totaled $33.9 million, down 24% from the prior-year quarter.

Revenues, Expenses & AUM Down

Operating revenues declined 9% year over year to $270.2 million, reflecting lower investment management fees, underwriting and distribution fees, and shareholder service fees. However, the figure beat the Zacks Consensus Estimate of $265.7 million.

Gross sales declined 27% year over year to $2.13 billion. Redemptions fell 26% to $4.49 billion. Net outflows were $2.36 billion, down 25%.

Operating expenses declined 3% year over year to $228.9 million. Almost all expense components, except for distribution costs and sub-advisory fees, witnessed a fall.

Operating margin was 15.3%, down from 19.7%.

As of Jun 30, 2019, AUM totaled $71.9 billion, down 9% year over year.

The company’s cash and cash equivalents, and investment securities totaled $866.8 million as of Jun 30, 2019. Long-term debt was $94.9 million and stockholders’ equity was $868.6 million.

Performance of Distribution Channels

At the Unaffiliated channel, gross sales fell 27% year over year to $1.29 billion. Net outflows were $847 million, up 45%.

Gross sales at the Institutional channel were $54 million, plunging 65% from the year-ago quarter. The segment witnessed net outflows of $361 million, down 76%.

At the Wealth Management channel, gross sales declined 21% year over year to $789 million. Net outflows totaled $1.15 billion, up 9%.

Share Repurchases

Waddell & Reed bought back 2.10 billion shares for $40.1 million during the reported quarter.

Outlook

The company expects controllable expenses to be nearly $106-$108 million per quarter in the second half of 2019.

In relation to Waddell & Reed’s plans of outsourcing the transactional processing operations for its transfer agency, it is expected to record a pre-tax restructuring charge of $4-$6 million, which will be spread across the last two quarters of 2019.

The effective tax rate is expected to be 23-25%, going forward.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision flatlined during the past month.

VGM Scores

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.

Outlook

Waddell & Reed 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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