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Federated (FII) Q1 Earnings Beat as Fee Waivers Fall

Driven by lower fee-waivers, Federated Investors, Inc. FII delivered a positive earnings surprise in first-quarter 2016, marking the fourth consecutive quarter of an earnings beat. Earnings per share of 44 cents beat the Zacks Consensus Estimate by a penny and improved 26% year over year.

The better-than-expected results were mainly driven by a rise in total revenue and a surge in equity asset balances. Notably, results benefited from the December rate hike as the company recorded decline in voluntary fee-waivers related to money market funds. Also, assets under management (AUM) witnessed a rise. However, higher expenses remained a headwind.

Net income for the quarter came in at $45.2 million, up 25% year over year.

 

Performance in Detail

Total revenue for the first quarter jumped 23% year over year to $272.1 million and also surpassed the Zacks Consensus Estimate of $266 million.

The year-over-year growth in revenues was mainly attributable to reduced voluntary fee-waivers related to money market funds. Moreover, net investment advisory fees increased 24% year over year to $181.8 million.

During the quarter, Federated derived 47% of its revenues from money market assets and remaining 53% from fluctuating assets (36% from equity assets and 17% from fixed-income assets).

Further, driven by a rise in investment income, the company reported non-operating income of $1.6 million in the quarter as against non-operating expenses of $0.5 million recorded in the prior-year quarter.

Total operating expenses climbed 22% year over year to $197.6 million in the quarter. The rise primarily reflects an elevated distribution, systems & communication and professional service fees. These were, however, partially offset by a fall in advertising and promotional expenses and other expenses.

Assets Position

As of Mar 31, 2016, total AUM was $369.7 billion, up 4% year over year. Average managed assets were $363.9 billion, up 1% from the prior-year quarter.

Federated witnessed a record equity assets of $56.5 billion, up 5% year over year. Also, Money market assets increased 6% year over year to $262.0 billion. Money market mutual fund assets came in at $224.7 billion, up 5% year over year.

However, fixed-income assets decreased 4% year over year to $51.2 billion.

As of Mar 31, 2016, cash and other investments were $342.0 million, compared with $346.8 million as of Dec 31, 2015. Total long-term debt was $184.9 million compared with $191.3 million as of Dec 31, 2015.

Capital Deployment Update

During the first quarter, the company repurchased 522,700 shares of Federated class B common stock for $13.7 million.

Our View

Federated exhibits substantial growth potential, given its diverse asset and product mix as well as a strong liquidity position. Moreover, strategic acquisitions are expected to be favorable for the company. Additionally, with further rise in interest rates, lower fee waivers should continue to support Federated’s top-line performance in the near term.

However, stringent regulations and escalating costs will likely continue to exert pressure on the company’s earnings.

Currently, Federated carries a Zacks Rank #3 (Hold).

Performance of Other Investment Managers

Janus Capital Group, Inc. JNS reported first-quarter 2016 earnings per share attributable to common shareholders of 19 cents, missing the Zacks Consensus Estimate by 2 cents. Moreover, earnings fell below the prior-year quarter figure of 23 cents. Lower-than-expected results reflected the reduction in revenues and decrease in AUM. However, the decline in operating expenses is a result of prudent expense management.

T. Rowe Price Group, Inc. TROW reported impressive first-quarter 2016 results with net income of $1.15 per share outpacing the Zacks Consensus Estimate of $1.02. Moreover, the reported figure increased from the year-ago earnings of $1.13. Notably, the results included higher non-operating income from realized gains on investments and implementation of a new accounting guidance associated with the consolidation of certain sponsored investment portfolios.

Invesco Ltd. IVZ reported first quarter 2016 adjusted earnings of 49 cents per share, missing the Zacks Consensus Estimate of 54 cents. Also, the bottom line came in 22.2% below the prior-year tally. Lower-than-expected results were mainly due to soft revenues as well as assets AUM. Also, long-term net outflows further added to the woes. However, lower expenses were the upside along with an increase in dividend, which will likely boost investors’ confidence in the stock.

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