We are downgrading our recommendation on Invesco (IVZ) to Underperform from Neutral.
Invesco’s fourth-quarter earnings came in at 25 cents per share, 3 cents short of the Zacks Consensus Estimate of 28 cents. However, this compares favorably with the earnings of 8 cents in the prior-year quarter. The year-over-year increase in Invesco’s earnings was due primarily to a 17.9% increase in operating revenues, partially offset by a 6.8% increase in operating expenses.
Though the economy is showing signs of recovery, the turmoil in the financial markets is expected to continue, a situation that may cap the upward potential of the share price in the near-to-medium term. We saw some effects of the turmoil during the last few quarters as redemptions increased. Though the equity markets are showing signs of improvement, the recent volatility in the market is expected to mar investors’ confidence. So we don’t expect any significant improvement in net flows in the near future.
Also, while management is optimistic about the future of Invesco’s stable value business, we think the company could again experience a significant outflow of stable value. Also, a significant portion of the company’s business and total assets under management (AUM) are based outside the U.S. The volatility of the U.S. dollar against other transacted currencies had a negative impact on the financials. For Invesco, the currency impact is expected to vary from period to period.
However, Invesco being well-positioned in developed as well as high-growth markets is focused on seizing the advantage of steady growth in established markets and rapid growth in emerging markets. In terms of products as well, Invesco offers a variety of traditional to alternative products to suit client requirements.
Invesco has taken a prudent approach to reduce its costs over the last few years and intends to continue its disciplined expense management, though not at the cost of future growth. The company has been operating more efficiently and effectively by leveraging its global operating platforms, streamlining its operations as well as reducing and moving to lower cost operating centers.
Though we expect improvement in operating leverage from the expense reduction initiatives and improved global flows due to its broad diversification, we believe such improvements would be significantly limited in the near term given the ongoing volatility in the equity markets worldwide. Also, Invesco’s earnings are susceptible to foreign exchange fluctuations.
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