We have upgraded our long-term recommendation on Ameriprise Financial Inc. (AMP) to “Outperform” from “Neutral”, based on its healthy balance sheet and the recent upgrades by rating agencies.
Ameriprise’s second quarter 2010 operating earnings of $1.10 per share were significantly ahead of the Zacks Consensus Estimate of 77 cents. The results also surpassed the prior quarter’s 81 cents and the prior-year quarter’s 47 cents.
Ameriprise’s results for the second quarter mainly benefited from increased asset-based fees from market appreciation and higher client activity and higher investment yields as a result of re-engineering efforts. Also, growth in operating earnings was primarily attributable to continued margin improvement in Advice & Wealth Management as well as Asset Management segments.
Ameriprise’s outlook was upgraded by A.M. Best to “Stable” from “Negative” in August 2010. The upgrade was based on an improved outlook for the strong risk-adjusted capital position, enhanced liquidity and balance sheet strength of Ameriprise. Similarly, in July, Standard & Poor’s also upgraded Ameriprise’s outlook to “Stable” from “Negative”, based on improved second quarter 2010 results. These rating improvements are expected to increase the investors’ confidence in the stock.
Ameriprise operates a well-diversified portfolio compared with its peers. From time to time the company molds its product and service offerings to keep pace with the market needs. Going forward, we believe new products with the existing portfolio will facilitate top-line growth.
Besides, the company has been growing inorganically as well. In May 2010, the company acquired the long-term asset management business of Columbia Management from Bank of America. This acquisition fits well with the company’s long-term asset management offerings and is expected to be accretive to operating earnings and ROE within a year of closing the deal.
Ameriprise continues to operate on a sound balance sheet by utilizing enterprise risk management capabilities and product hedging to anticipate and mitigate risk. The modest dip in the company’s debt-to-total capital ratio, from 22.1% at the end of fiscal 2008 to 19.5% at the end of 2009, projects management’s ability to gain significant capital leverage for the company in future.
However, the recently signed Dodd-Frank Act calls for sweeping changes in the supervision and regulation of the financial industry. The Act is expected to affect the manner in which Ameriprise markets its products and services, manages its operations and interacts with regulators, all of which could materially impact the results of operations, financial condition and liquidity over the near term.
Also, its fixed interest costs, claims, losses and settlement expenses continue to rise significantly, even though Ameriprise is successful in reducing its deferred and acquisition related costs through re-engineering initiatives. Going forward, these expenses could rise until the economy rebounds. Management’s higher tax rate projections for the remainder of 2010 only add to the expense burden.
Though there are concerns related to the sluggish equity market recovery, a probability of higher tax expenses and the significant cost of maintaining high liquidity levels, improvement in retail client activity will drive Ameriprise’s operating leverage in the upcoming quarters. We also expect the acquisition of Columbia Management to provide far-reaching product distribution opportunities.
Ameriprise’s shares currently retain a Zacks #2 Rank. This translates into a short-term ‘Buy’ rating and indicates a slight likelihood of upward pressure on the shares over the near term.
AMERIPRISE FINL (AMP): Free Stock Analysis Report
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