We have reiterated our Neutral recommendation on Federated Investors Inc. (FII) as the company’s fourth-quarter earnings marginally surpassed the Zacks Consensus Estimate.
Federated reported fourth-quarter earnings came in at 45 cents per share, which outpaced the Zacks Consensus Estimate by 2 cents, missing the year-ago earnings of 51 cents per share. However, this compares favorably with 42 cents per share reported in the prior quarter.
Results reflected an increase in fixed income equity funds and assets, decrease in operating expenses and a decline in the amortization of deferred sales commissions. This was partly offset by an increase in voluntary fee waivers, reduced top-line growth and lower AUM on a year-over-year basis.
Federated is one of the largest mutual fund managers in the U.S. Its business mix includes products that are found to be functional under diverse market conditions. The company has structured its investment process to meet the requirements of fiduciaries and others, who use its products to satisfy the needs of their customers. Fiduciaries typically have stringent demands regarding portfolio composition, risk and investment performance.
The company continues to look for considerable opportunities to crack profitable deals. It intends to further extend its business outside the U.S. as part of its strategy to expand globally, including money market business.
For Federated, cash and marketable securities totaled $334 million at the end of 2010. The expected additional cash flows from operations and availability under present debt facilities will help the company to take advantage of the acquisition opportunities whenever they arise. It will also have the ability to fund related contingent payments, repurchase shares and pay dividend.
On the flip side, lowered AUM has resulted in a negative organic growth in the core business as investors transfer cash from money market funds to higher yielding bank deposits or investments across the fixed income universe and equities. Growth outlook remains clouded until the company renovates its functional strategy to keep pace with the investors’ needs.
As of December 31, 2010, approximately 50% of Federated’s total revenue was attributable to money market managed assets. A significant reduction in money market managed assets due to changes in the financial markets including significant increases in interest rates over a short period of time, considerable deterioration in investor confidence, prolonged periods of historically low short-term interest rates and resulting fee waivers could have a material adverse effect on Federated’s results of operations.
Nevertheless, Federated is in a restructuring and recovering phase and the bumps created by the recession in the ride are justified at the moment. The near-term outlook remains cautious and we wait for a strong and steady rebound that will help to increase its market activity and regenerate client demand. Overall, the company has the potential for substantial growth in the long run, given its fairly healthy balance sheet, cost-cutting initiatives and a diversified asset and product mix.
Federated currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. The company’s peer – Janus Capital Group Inc. (JNS) also retains a Zacks#3 Rank (a short-term ‘Hold’ rating).
FEDERATED INVST (FII): Free Stock Analysis Report
JANUS CAP GRP (JNS): Free Stock Analysis Report
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