Federated Investors (FII): High Revenues Drove Q2 Earnings

Propelled by lower fee-waivers, Federated Investors, Inc. (NYSE:FII) delivered a positive earnings surprise in second-quarter 2016, marking the fifth straight quarter of an earnings beat. Earnings per share of 53 cents beat the Zacks Consensus Estimate of 47 cents and improved 32.5% year over year.

The better-than-expected results came chiefly on the back of higher revenue and increased equity asset balances. Notably, the company also recorded decline in voluntary fee-waivers related to money market funds though rise in assets under management (AUM) was another positive. However, higher expenses remained a major headwind.

Including non-recurring items, net income for the quarter came in at $52.7 million or 51 cents per share compared with $41.8 million or 40 cents per share in the prior-year quarter.

Revenue Jumps; Expense Escalates

Total revenue for the second quarter rose 26% year over year to $286.7 million and also outpaced the Zacks Consensus Estimate of $286 million.

The year-over-year growth in revenues can mainly be attributed to reduced voluntary fee-waivers related to money market funds. Moreover, net investment advisory fees increased 25% year over year to $192.7 million.

During the quarter, Federated derived 47% of its revenues from money market assets and remaining 53% from fluctuating assets (37% from equity assets and 16% from fixed-income assets).

Further, driven by a rise in investment income, the company reported non-operating income of $0.08 million in the quarter as against non-operating expenses of $0.58 million recorded in the prior-year quarter.

Total operating expenses climbed 25% year over year to $199.1 million in the quarter. The rise primarily exhibits an escalation in distribution, systems & communication and advertising and promotional expenses. These were, however, partially mitigated by a fall in professional service fees and other expenses.

Strong Assets Position

As of Jun 30, 2016, total AUM was $367.2 billion, up 5% year over year. Average managed assets were $364.2 billion, up 4% from the prior-year quarter.

Federated witnessed a record equity assets of $61.9 billion, up 13% year over year. Also, Money market assets increased 5% year over year to $255.0 billion. Money market mutual fund assets came in at $218.1 billion, up 4% year over year.

However, fixed-income assets decreased 5% year over year to $50.3 billion.

As of Jun 30, 2016, cash and other investments were $352.5 million, compared with $346.8 million as of Dec 31, 2015. Total long-term debt was $178.5 million compared with $191.3 million as of Dec 31, 2015.

Capital Deployment Update

During the second quarter, the company repurchased 918,050 shares of Federated class B common stock for $27.3 million.

Our View

Federated with its diverse asset and product mix, along with its a strong liquidity position, displays a substantial growth potential. Moreover, strategic acquisitions are anticipated to be favorable for the company. Additionally, with further rise in interest rates, lower fee waivers should continue to aid Federated’s top-line performance in the near term.

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 #3 (Hold).

Competitive Landscape

T. Rowe Price Group, Inc. (NASDAQ:TROW) reported second-quarter 2016 net income of 76 cents per share missing the Zacks Consensus Estimate of $1.13. Moreover, the reported figure decreased from the year-ago earnings of $1.24. Notably, results included non-recurring operating charge associated with the compensation to certain clients in relation to the Dell appraisal rights matter which resulted in reduced net income by 39 cents per share.

Janus Capital Group, Inc. (NYSE:JNS) recorded a negative earnings surprise of 4.55% in second-quarter 2016. The company reported earnings per share attributable to common shareholders of 21 cents, missing the Zacks Consensus Estimate by a penny. Moreover, results fell below the prior-year quarter figure of 23 cents.

Ameriprise Financial Inc. (NYSE:AMP) reported second-quarter 2016 operating earnings per share of $2.23, missing the Zacks Consensus Estimate of $2.27. The figure also represents a year-over-year decrease of 4.5%. The results came in lower than expected primarily due to a drop in revenues. However, a decline in operating expenses and increase in AUM along with assets under administration were the positives.

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