On Wednesday, Waddell & Reed Financial Inc.’s (WDR) long-term counterparty credit rating was raised by the rating agency Standard & Poor’s Ratings Services to ‘BBB+’ from ‘BBB’. The outlook for the company remains ‘Stable’.
The upgrade is primarily based on the Waddell & Reed’s improved financial position and  strong second quarter results. The company’s financial strength is measured by its short interest coverage, ample liquidity and modest debt leverage. The rating agency also cited that Waddell & Reed’s diversified and strong distribution channels to justify the higher rating.
Waddell & Reed’s second quarter 2010 earnings of 40 cents per share came in a penny, short of the Zacks Consensus Estimate of 41 cents. However, this compares favorably with earnings of 27 cents in the prior-year quarter.
Results for the quarter were aided primarily by improved gross sales across all of Waddell & Reed’s revenue channels except Wholesale, stronger growth in assets under management (AUM) and an improved operating margin. Offsetting these positives were significantly lower net inflow and higher operating expenses. However, positive flow was witnessed in each of Waddell & Reed’s three distribution channels.
Though we expect that Waddell & Reed will be able to maintain its strong growth story with increasing AUM as a result of solid investment and sales performance, operating margin compression following growth in flow and significant intangibles on its balance sheet will drag profitability. However, the current rating upgrade will boost the investors’ confidence on the stock regarding the company’s financial stability.
Waddell & Reed currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Also, considering the fundamentals, we maintain a long-term Neutral recommendation on the stock.

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