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Federated (FII) Q3 Earnings Beat As Fee Waiver Declines

Published 10/28/2016, 01:37 AM
Updated 07/09/2023, 06:31 AM

Federated Investors, Inc. (NYSE:FII) posted a positive earnings surprise of 3.8% for third-quarter 2016, marking the sixth straight quarter of an earnings beat. Earnings per share of 54 cents beat the Zacks Consensus Estimate of 52 cents and also improved 29% year over year.

Better-than-expected results were primarily backed by higher revenues, driven by reduced voluntary fee waivers. Also, assets under management (AUM) improved during the quarter. However, the downside was higher expenses.

Net income for the quarter came in at $54.9 million, up 24% year over year.

Uptrend in Revenue & Expense

Total revenue in the third quarter rose 26% year over year to $294.6 million but missed the Zacks Consensus Estimate of $296 million.

The year-over-year growth in revenues can mainly be attributed to reduced voluntary fee waivers related to money market funds and increased revenue from higher average equity assets. This was partially mitigated by decreased revenue resulting from change in the mix of average money market assets.

Moreover, net investment advisory fees increased 24% year over year to $197.2 million. Also, net service fees (other) marked a notable increase, amounting to $42.7 million compared with $21.2 million in the year-ago quarter.

During the quarter, Federated derived 45% of its revenues from money market assets and remaining 55% from equity and fixed-income assets.

Further, driven by a rise in net investment income, the company recorded a spectacular improvement in non-operating income of $2.9 million in the quarter as against non-operating expenses of $4 million in the prior-year quarter.

Total operating expenses surged 29% year over year to $205.9 million. The rise primarily exhibits an escalation in distribution expenses, resulting from a decrease in voluntary yield-related fee waivers.

Steady Asset Position

As of Sep 30, 2016, total AUM was $364.3 billion, up 4% year over year. Average managed assets were $365.4 billion, up 4% from the prior-year quarter.

Federated witnessed a record equity assets of $64.1 billion, up 23% year over year. Also, money market assets increased 1% year over year to $248.4 billion.

However, fixed-income assets decreased slightly year over year to $51.8 billion, from $52.1 billion as of Sep 30, 2015. Also, money market mutual fund assets came in at $209.4 billion, down 3% year over year.

As of Sep 30, 2016, cash and other investments were $380.5 million and total long-term debt totaled $172.1 million, compared with $346.8 million and $191.3 million, respectively, as of Dec 31, 2015.

Capital Deployment Update

During the third quarter, the company repurchased 906,454 shares of Federated class B common stock for $23.1million, leaving nearly 537,000 outstanding shares.

Further, concurrent with the earnings release, the company announced a new share repurchase program, under which it will buy back up to 4 million additional shares of class B common stock.

Also, the company’s board of directors declared a dividend of $1.25 per share, comprising 25 cents of quarterly dividend and a $1.00 special dividend. The dividend will be paid on Nov 15 to shareholders of record as of Nov 8.

Notably, this marks the fourth special dividend in eight years and draws the special dividends total to $6.53 per share, since 2008.

Our Viewpoint

Federated, with its diverse asset and product mix, along with a strong liquidity position, displays a substantial growth potential. Additionally, with anticipated rise in interest rates, lower fee waivers will continue to aid the company’s top-line performance.

However, stringent regulations and escalating costs will continue to exert pressure on the company’s earnings.

FEDERATED INVST Price, Consensus and EPS Surprise

FEDERATED INVST Price, Consensus and EPS Surprise | FEDERATED INVST Quote

Currently, Federated carries a Zacks Rank #4 (Sell). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Performance of Other Investment Managers

Franklin Resources, Inc. (NYSE:BEN) reported earnings per share of 82 cents, handily beating the Zacks Consensus Estimate of 69 cents. Moreover, results compared favorably with the prior-year quarter' earnings of 59 cents.

Results were aided by a decline in expenses, partially offset by reduced revenues. Notably, the quarter recorded a decline in assets under management (AUM) and recorded net outflows.

SEI Investments Co. (NASDAQ:SEIC) reported earnings per share of 53 cents that outpaced the Zacks Consensus Estimate by 4 cents. Moreover, the bottom line improved 13% from the prior-year quarter tally of 47 cents.

Higher revenues and income from operations, along with improvement in asset position, aided the better-than-expected results. On the down side, the quarter witnessed an increase in expenses.

T. Rowe Price Group, Inc. (NASDAQ:TROW) reported a negative earnings surprise of 2.5% for third-quarter 2016. Adjusted earnings per share of $1.17 missed the Zacks Consensus Estimate of $1.20. However, the bottom line improved 10% from the year-ago earnings of $1.06.

Increase in net revenue and assets under management (AUM) were the positive factors, while elevated operating expense was a drag.

Results exclude higher non-operating income associated with the implementation of a new accounting guidance in Jan 2016, related to the consolidation of certain sponsored investment portfolios.

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T ROWE PRICE (TROW): Free Stock Analysis Report

FEDERATED INVST (FII): Free Stock Analysis Report

FRANKLIN RESOUR (BEN): Free Stock Analysis Report

SEI INVESTMENTS (SEIC): Free Stock Analysis Report

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