Federated (FII) Earnings Beat Estimates on High Revenues
Driven by strong top-line performance, Federated Investors Inc. (FII) reported third-quarter 2014 earnings per share of 36 cents, beating the Zacks Consensus Estimate by a penny. However, results were in line with the prior-year quarter earnings.
Increased revenues and record high equity assets acted as tailwinds for the quarter. However, higher expenses and decline in assets under management (AUM.TO) were on the downside.
Net income for the quarter under review came in at $37.6 million compared with $37.7 million in the prior-year quarter.
Performance in Detail
Total revenue increased 2% year over year to $216.9 million. The reported revenues were also above the Zacks Consensus Estimate of $214 million.
The upsurge was due to a rise in average equity assets, partially offset by reduced average money market assets. Moreover, net investment advisory fees recorded a 5% year-over-year increase and stood at $141.1 million.
During the reported quarter, Federated derived 30% of its revenues from money market assets, 69% from fluctuating assets (46% from equity assets and 23% from fixed-income assets) and the remaining 1% from other products and services.
Total operating expenses ascended 1% on a year-over-year basis to $156.1 million in the quarter. The rise in expenses primarily reflects elevated compensation and related expense along with increased office and occupancy expenses.
Assets Position
As of Sep 30, 2014, total AUM was $352.3 billion, down 4% from $366.7 billion as of Sep 30, 2013. Average managed assets were $349.2 billion, down 4% from $364.2 billion in the prior-year quarter.
At quarter end, equity assets came in at a record $50.3 billion, up 25% year over year. Fixed-income assets rose 2% year over year to $51.2 billion.
However, money market assets were $245.5 billion, down 9% on a year-over-year basis. Money market mutual fund assets came in at $215.2 billion, down 10% year over year.
As of Sep 30, 2014, cash and other investments were $352.3 million, up from $292.2 million as of Dec 31, 2013. Total long-term debt was $380 million, up from $339.7 million as of Dec 31, 2013.
Capital Deployment Update
In third-quarter 2014, Federated repurchased 248,679 shares of Federated class B common stock for $7.2 million.
Competitive Landscape
Among other investment managers, T. Rowe Price Group, Inc. (TROW) reported its third-quarter 2014 net income of $1.12 per share, lagging the Zacks Consensus Estimate by 3 cents, while BlackRock, Inc.’s (BLK) third-quarter adjusted earnings of $5.21 per share significantly surpassed the Zacks Consensus Estimate of $4.71 for the fourth consecutive quarter. Invesco Ltd. (IVZ) is scheduled to release results on Oct 30.
Our Viewpoint
Though the company has the potential for significant growth in the long run, given its fairly liquid balance sheet and a diversified asset as well as product mix, higher expenses remain a concern. Capital deployment activities are expected to augur well. Moreover, top-line growth was reflected in the quarter.
However, persistent regulatory pressures, slow global economic growth and a low-interest rate environment are expected to keep Federated’s earnings under pressure in the upcoming quarters. Shares of Federated currently carry a Zacks Rank #3 (Hold).
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