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Waddell & Reed (WDR) Earnings: Stock Falls 8% on Outflows

Shares of Waddell & Reed Financial Inc. WDR lost nearly 8% following the release of first-quarter 2016 results before the market opened yesterday. Earnings of 45 cents per share came in 44% below the prior-year figure. Moreover, earnings, adjusted for a $9.6 million investment loss, came to 57 cents per share. The Zacks Consensus Estimate was 55 cents.

We believe the fall in Waddell & Reed’s stock price depicts heightened concerns regarding the company’s future performance in light of continued market volatility. Despite the company’s cost cutting initiatives, the magnitude of net outflows and weakness in fund performance continue to make investors wary.

Results exhibited a fall in revenues and weak gross sales. However, lower expenses were an upside. Further, weakness in assets under management (“AUM”), along with elevated outflows, was the undermining factor.

Net income totaled $37.0 million, down 45% year over year.

Details

Operating revenues fell 16% year over year to $323.8 million, reflecting a decline in all components. Also, it missed the Zacks Consensus Estimate of $328 million.

Gross sales declined 33% year over year to $3.7 billion. Redemptions rose 11% year over year to $9.9 billion. Further, net outflows were $6.3 billion at quarter end, surging 77% year over year.

At Retail Broker-Dealer, gross sales decreased 16% year over year to $1.1 billion. Net outflows totaled $301 million, up 29% year over year. Retail Broker-Dealer was previously referred to as the “Advisors channel”.

At Retail Unaffiliated Distribution, gross sales declined 45% year over year to $2.1 billion. Net outflows amounted to $5.4 billion, significantly up year over year. Retail Unaffiliated Distribution was previously referred to as the "Wholesale channel”.

Gross sales at the Institutional channel were $453 million, surging 51% from the year-ago quarter. However, the segment witnessed net outflows of $601 million, down 48% in the prior-year quarter.

Operating expenses fell 10% year over year to $252.4 million. The fall was mainly led by a decline in all expense components depreciation.

Operating margin was 22.1%, down from 27.1% a year ago.

As of Mar 31, 2016, AUM totaled $95.2 billion, down 23% from Mar 31, 2015, due to a rise in net outflows and unfavorable market action.

As of Mar 31, 2016, the company’s cash and cash equivalents as well as investment securities totaled $819.9 million. Moreover, long-term debt totaled $189.5 million and stockholders’ equity was recorded at $846.7 million.

Share Repurchase

In the reported quarter, Waddell & Reed bought back 1.1 billion shares for $25.6 million. Overall, the company returned $63.7 million to its shareholders in the form of dividends and share repurchases during the first quarter.

Our View

Waddell & Reed’s strained top line and persistent rise in outflows raise concerns about its prospects. Also, a rise in redemption rates, a competitive landscape and unfavorable market conditions are anticipated to trouble its financials in the near term.

However, the company remains well positioned for future growth, backed by its constant efforts toward development. Moreover, a strong balance sheet and effective capital deployment activities will likely work in its favor.

Currently, Waddell & Reed has a Zacks Rank #3 (Hold).

Other Investment Managers

BlackRock, Inc. BLK reported first-quarter 2016 adjusted earnings of $4.25 per share, which lagged the Zacks Consensus Estimate of $4.29. Lower-than-expected quarterly results were due to a decrease in revenues triggered by market volatility. However, an almost stable expense line was a positive.

The Blackstone Group L.P. BX reported first-quarter 2016 economic net income (ENI) of 31 cents per share, which lagged the Zacks Consensus Estimate of 44 cents. Results were affected by a steep decline in revenues that stemmed from a fall in performance fees. However, lower expenses were a positive during the quarter.

Affiliated Managers Group Inc. AMG is scheduled to report first-quarter 2016 earnings results on May 3.

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