Federated Investors Inc. (FII) reported third quarter operating earnings per share of 42 cents, which surpassed the Zacks Consensus Estimate by 4 cents and missed the year-ago earnings of 56 cents. The reported earnings were also below 46 cents per share reported in the prior quarter.
GAAP net income decreased 24% year over year and 10% from the prior quarter to $43.1 million. Operating income was down 21% year over year and 10% sequentially to $75.1 million.
Results reflected an increase in fixed income equity funds and fixed income assets, decrease in operating expenses and a decline in the amortization of deferred sales commissions. This was offset by an increase in voluntary fee waivers, reduced top-line growth and lower assets under management (AUM) on a year-over-year basis.
Quarter in Detail
Total revenue decreased 18% year over year, but increased 5% from the prior quarter to $242.2 million and was approximately in line with the Zacks Consensus Estimate of $243.0 million. The decrease was primarily attributable to an increase in voluntary fee waivers related to certain money market funds in order to maintain positive or zero net yields. Alongside, revenue declined due to lower average money-market managed assets that were partially offset by the impact of increased average fixed-income and equity managed assets.
During the reported quarter, Federated derived 51% of its revenue from money market assets, 48% from fluctuating assets (30% from equity assets and 18% from fixed-income assets) and 1% from other products and services.
Total operating expenses decreased 16% year over year to $167.1 million, primarily reflecting lower general, administrative and distribution expenses due to the aforementioned fee-waiver related reductions and lower average money market managed assets. Expenses spiked 13% sequentially, principally due to credit of insurance proceeds of the previous quarter that reduced operating expenses by $25.0 million, partially offset by non-cash impairment charge of $7.0 million during the prior quarter related to intangible and fixed assets associated with the prior-year acquisition.
Asset Position
As of September 30, 2010, total AUM was $341.3 billion, down 13% from $392.3 billion as of September 30, 2009 and slightly up from $336.8 billion reported as of June 30, 2010. Average managed assets were $338.6 billion, down from $408.1 billion in the year-ago quarter and up from $337.1 billion in the prior quarter.
At quarter-end, fixed-income assets increased 26% year over year and 6% from prior quarter to $40.2 billion. Equity assets came in at $29.1 billion, flat year over year, but up 9% from the prior quarter. However, money market assets in both funds and separate accounts declined by 18% year over year and marginally increased from prior quarter to $260.9 billion.
At the end of the third quarter of 2010, cash and other short-term investments were $315.9 million, up from $122.0 million at the end of December 31, 2009. However, total long-term debt was $378.5 million, up from $118.6 million at the end of December 31, 2009. During the reported quarter, Federated Investors purchased 147,849 shares of Federated Class B common stock for $2.7 million.
Dividend Update
The board of Federated Investors declared a quarterly dividend of 24 cents per share, which will be payable on November 15, 2010 to shareholders of record as of November 8, 2010.
Federated’s closest competitor BlackRock Inc. (BLK), however, reported increased AUM for the third quarter of 2010, attributable to solid investment performance, positive foreign exchange movements and strong net new business.
The financial service industry had been the hardest hit zone during the economic crisis in 2008 and Federated Investors was one to be jolted by the credit crunch. Federated experienced a significant reduction in money market managed assets. However, the company is now in a restructuring and recovering phase, hence the bumps in the ride are justified at the moment.
Nevertheless, the near-term outlook remains cautious and we wait for a strong and steady rebound that will help increase 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, firm cost-cutting initiatives and a diversified asset and product mix.
Federated currently retains its Zacks #3 Rank, which translates to a short-term Hold rating. Considering the fundamentals, we are maintaining our Neutral recommendation on the stock.
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