Overview - Zacks Investment Research
Federated Investors Inc. |(FII - NYSE) |$26.64 | |
Note: This report contains substantially new material. Subsequent reports will have changes highlighted.
Reason for Report: 1Q13 Earnings Update
Prev. Ed.: 4Q12 and 2012 Earnings Update, Feb 25, 2012
Brokers’ Recommendations: Negative: 62.5% (5 firms); Neutral: 37.5% (3); Positive: 0.0% (0) Prev. Ed.: 5; 4; 0
Brokers’ Target Price: $22.56 (↑$0.31 from last edition; 8 firms) Brokers’ Avg. Expected Return: -15.3%
Note: A Flash Update on 1Q13 Earnings was done on Apr 25, 2013.
Portfolio Manager Executive Summary
Federated Investors Inc. is a publicly owned investment manager with over $377.3 billion in assets under management (AUM) as of Mar 31, 2013. More than two-thirds of its AUM consists of money funds, which are distributed through bank trust departments, brokers/dealers, and directly to the institutional market. The bulk of equity and fixed income AUM are mutual fund products, including the Federated Kaufman Fund.
Trend of Broker Opinions: Broker sentiment on the stock remains skewed toward the bearish side, with 62.5% of the firms in the Digest group rating the stock negative and the remaining 37.5% rating it neutral. None of the firms rendered a positive rating. Target prices provided by the firms range from a low of $20.00 to a high of $25.00 per share. The average came in at $22.56, implying a negative return of 15.3%.
Chief Investment Considerations:
▪ Positive operating leverage
▪ Ability to return capital to its shareholders
▪ Volatile growth in AUM
▪ Uncertainty regarding rise in short-term interest rates
▪ Regulatory issues in money markets
Negative or equivalent outlook (62.5% or 5/8 firms): These firms are anxious that amid expectations of a strong equity market environment, Federated’s fixed income funds might encounter slow redemptions and the equity funds leaning toward bear market strategies may generate a weak performance. Moreover, until the money market reform overhang is resolved, the shares are expected to remain under pressure. Further, the current low rate environment, an anticipated near-term regulatory reform proposal, and relatively reduced long-term flow trends continue to remain as headwinds in the near term. Therefore, these firms have maintained a negative stance.
Neutral or equivalent outlook (37.5% or 3/8 firms): These firms believe that Federated’s shares will trade at a discount in the coming quarters, following the current volatile economic environment. Recently, the Securities and Exchange Commission (SEC) clarified that new potential reforms are in discussion including a floating NAV for certain money market funds, in particular prime funds. It could also include a floating NAV proposal for all money market funds as well as other reform measures. The firms believe that if the recommended changes are implemented, they will considerably reduce attractiveness and utility associated with money market funds for investors. If ultimately enacted, these changes will be detrimental to Federated's money market fund business and can affect operations adversely. Therefore, management is carefully monitoring developments in this area and intends to actively participate, both individually and with industry groups in the public comment process that will accompany any rule change proposal.
May 24, 2013
Overview
Federated Investors Inc. (FII), founded in 1955, is a publicly owned investment management company with headquarters in Pittsburgh, Pa. The company, together with its subsidiaries, is one of the largest investment managers in the United States, with $377.3 billion in managed assets as of Mar 31, 2013. The majority of Federated’s revenues is derived from advising and administering Federated mutual funds and Separate Accounts (which include separately managed accounts, institutional accounts, sub-advised funds and other managed products) in both domestic and international markets. The company also earns revenues from various other mutual fund-related services including distribution, shareholder servicing and retirement plan record-keeping services.
Federated provides comprehensive investment management to nearly 4,700 institutions and intermediaries, including corporations, government entities, insurance companies, foundations and endowments, banks and broker/dealers. The company uses its trained sales force of approximately 200 representatives and managers, and roughly 1,402 employees to win new customers as well as strengthen its existent relationship with clients.
Federated’s investment products are primarily distributed in 4 markets: wealth management and trust (holding 48% of managed assets in 2012), broker/dealer (31%), institutional (12%) and international (6%). Federated makes its fixed income investments in ultra-short, short-term, intermediate-term mortgage-backed, U.S. government, U.S. corporate, high-yield and municipal securities. The company employs a fundamental and a quantitative analysis to make its equity investments. It also makes sector-focused equity investments.
Federated’s principal source of revenues is investment advisory fee earned by various subsidiaries. Additionally, the company generates revenues from administrative service fee and other service fee. Its website is .
The investment management business is highly competitive, particularly among mutual fund providers. In addition to other mutual fund managers and investment advisers, Federated and the mutual fund industry compete with investment alternatives offered by insurance companies, commercial banks, brokers/dealers, other financial institutions, hedge funds and exchange traded funds.
The firms identified the following factors for evaluating the investment merits of Federated:
|Key Positive Arguments |Key Negative Arguments |
|Growth Opportunities |Fundamentals |
|Focused on augmenting the breadth of its equity offerings |Equity and fixed income funds continue to remain a drag on earnings |
|Growing money fund assets |Rising marketing and distribution expenses |
|Federated’s scale, especially on the institutional side, gives it a |NIM to remain under pressure as expenses are projected to increase with |
|competitive edge |revenue growth |
|Postponement of money funds reforms |Increased competition |
| |Legal and regulatory issues |
| |Low rate environment |
| |Little expense flexibility along with continued AUM decline amid money |
| |market fund outflows pressuring margins |
Federated operates on a calendar year basis.
May 24, 2013
Long-Term Growth
The money funds business has been out of favor for the past few years, given the lack of competitive yields as compared to bank deposits that have retail money market outflows, and a rising rate environment that caused outflows on the institutional side of the business. The firms believe that a secular growth trend in money market assets will recommence as short-term rates rebound. Furthermore, Federated is the best-positioned asset manager in the industry to capitalize on this trend. However, despite being quite bullish in their outlook on money market funds, the firms remain cautious due to limited expense flexibility caused by increasing money market flows, greater workload due to acquisitions, and the rebuilding of its equity investment process.
Recently, the Securities and Exchange Commission (SEC) clarified that new potential reforms are under discussion, including a floating NAV for certain money market funds, in particular prime funds. It could also include a floating NAV proposal for all money market funds as well as other reform measures. The firms believe that if the recommended changes are enforced, they would considerably reduce attractiveness and utility associated with money market funds for investors.
May 24, 2013
Target Price/Valuation
Provided below is a summary of valuations and ratings as compiled by Zacks Research Digest:
|Rating Distribution |
|Positive |0.0% |
|Neutral |37.5%↓ |
|Negative |62.5%↑ |
|Average Target Price |$22.56↑ |
|Maximum Upside from Current Price |-6.2% |
|Minimum Upside from Current Price |-24.9% |
|Upside from Current Price |-15.3% |
|Digest High |$25.00↑ |
|Digest Low |$20.00 |
|Number of Analysts with Target Prices/Total |8/8↓ |
Risks to the target prices and ratings include a volatile rate environment, persistent high outflows on the equity and fixed income side, a less favorable yield curve for money market funds, intermediary risks, intense competition, and regulatory and legal issues.
Recent Events
On Apr 25, 2013, Federated reported its 1Q13 earnings. Earnings per share came in at $0.41, missing the Zacks Consensus Estimate by a penny. This also compares unfavorably with the prior quarter’s earnings of $0.44, though it came in line with the year-ago quarter figure.
Lower-than-expected results were due to a decline in the top line, owing to an increase in voluntary fee waivers. However, a rise in fixed income and equity assets were the positives. Moreover, decreased operating expenses reflect prudent expense management.
Net income for the quarter under review came in at $43.0 million compared with $50.0 million in the prior quarter and $42.0 million in the prior-year quarter.
Revenue
In 1Q13, the company reported revenues of $228.0 million, down 1.0% y/y and 7.0% sequentially. The y/y decrease was mainly due to an increase in voluntary fee waivers related to certain money market funds, partly offset by a rise in revenues attributable to higher average fixed-income and equity assets. The sequential decline was primarily due to an increase in voluntary fee waivers and lesser days in the reported quarter, partially offset by an increase in average assets.
In 1Q13, net investment advisory fees were $150.8 million, up 1.0% y/y but down 10.0% sequentially. Net administrative service fees were $56.8 million, down 1.0% both y/y and sequentially. Other service fees were $19.3 million, down 15.0% y/y and 2.0% sequentially. Other net revenues were $1.0 million, up 6.0% y/y and 28.0% sequentially.
In 1Q13, Federated derived 43.0% of its revenues from money market assets, 56.0% from fluctuating assets (33.0% from equity assets and 23.0% from fixed-income assets) and 1.0% from other products and services.
Outlook
Management anticipates 2Q13 money market fund fee waivers to bear the same impact as 1Q13, based on current AUM levels and short-term interest rates.
Looking forward and holding all other variables constant, management projects that a gain of 10 basis points (bps) in gross yields will likely reduce the impact of minimum yield waivers by about 40.0% and the 25 bps increase will reduce the impact by about 70.0%.
Some of the firms echo management’s sentiments regarding money market fee waivers. Further, some firms expect money market fee waivers to fall in 2014.
Margins
Operating expenses in 1Q13 were $159.8 million versus $161.6 million in 4Q12. The sequential decline primarily reflected lower distribution expense related to the increase in fee waivers, partly offset by an increase in compensation and related expense, as well as professional service fees. Operating expenses fell 0.1% y/y from $159.9 million.
In 1Q13, non-operating income was $1.1 million in comparison with expenses of $0.4 million reported in 1Q12 and $2.3 million in 4Q12.
Outlook
Management expects to control expenses and aims to achieve a positive operating leverage in the near term. Further, management anticipates compensation and related expenses to be approximately $69.0 million for 2Q13.
Earnings per Share
The company reported EPS of $0.41 in 1Q13 versus $0.41 in 1Q12 and $0.44 in 4Q12. In 1Q13, net income was $43.0 million compared with $42.3 million in 1Q12 and $49.6 million in 4Q12.
Notably, 4Q12 EPS was reduced by $0.04 per share as a result of the payment of a special dividend to shareholders based on 2-class method of computing EPS.
Outlook
Some firms have decreased their 2013 and 2014 EPS estimates in anticipation of higher fee waivers, and lower effective fee rate due to negative mix shift.
Balance Sheet/Capital Structure/Other
Balance Sheet
As of Mar 31, 2013, cash and other investments were $306.9 million, up from $258.6 million as of Dec 31, 2012. Total long-term debt was $265.6 million, down from $276.3 million as of Dec 31, 2012.
As of Mar 31, 2013, Federated’s total managed assets were $377.3 billion, up $13.7 billion or 4.0% y/y, but down $2.5 billion or 1.0% sequentially. Average managed assets were $381.2 billion, up $11.1 billion or 3.0% y/y and $12.5 billion or 3.0% sequentially.
At quarter-end, Federated’s fixed-income assets were $52.8 billion, up $6.6 billion or 14.0% y/y and $0.1 billion or 0.2% sequentially. Bond assets in liquidation portfolios were $7.0 billion. Fixed-income sales were driven by net sales in Federated Institutional High Yield Bond Fund, Federated's short-duration products, Federated Floating Rate Strategic Income Fund and Federated Bond Fund.
Federated’s equity assets were $37.9 billion as of Mar 31, 2013, up $3.8 billion or 11.0% y/y and $2.9 billion or 8.0% sequentially. Top-selling equity funds during 1Q13 on a net basis were Federated Kaufmann Large Cap Fund, Federated International Strategic Value Dividend Fund, Federated Capital Income Fund, Federated International Leaders Fund and Federated Managed Volatility Fund II.
Money market assets in both funds and separate accounts were $279.7 billion as of Mar 31, 2013, up $5.0 billion or 2.0% y/y but down $5.0 billion or 2.0% sequentially. Additionally, money market mutual fund assets were $242.7 billion as of Mar 31, 2013, down $2.5 billion or 1.0% y/y and $13.0 billion or 5.0% sequentially.
Federated's level of business activity and financial results are dependent upon many factors such as market conditions, investment performance and investor behavior. These factors and others including asset levels, product sales and redemptions, market appreciation or depreciation, revenues, fee waivers and expenses can impact Federated's activity levels and financial results significantly.
Fee waivers to maintain positive or zero net yields are likely to vary considerably in the future since they are dependent on numerous factors. These factors include, but are not limited to changes in assets within the money market funds, available yields on instruments held by the money market funds, actions by the Federal Reserve, the U.S. Department of the Treasury, the Financial Stability Oversight Council and other governmental entities, changes in expenses of the money market funds, changes in the mix of money market customer assets, Federated’s willingness to continue the fee waivers, and changes in the extent to which the impact of the waivers is shared by third parties.
Dividend
On Apr 25, 2013, Federated's board of directors announced a quarterly dividend of $0.24 per share. The dividend was paid on May 15, 2013 to shareholders of record as of May 8, 2013.
On Feb 15, 2013, Federated's board of directors paid a quarterly dividend of $0.24 per share to shareholders of record as of Feb 8, 2013.
During 1Q13, Federated purchased 131,472 shares of Federated class B common stock worth $2.7 million.
Outlook
Management expects the strong cash and investments position of Federated, along with expected additional cash flows from operations to provide the company scope to gain from acquisition opportunities, mainly in Asia Pacific and Europe and develop new products. Further, capital deployment activities will likely be boosted as well.
May 24, 2013
– The Online Stock Research Community
Discover what other investors are saying about Federated Investors Inc. (FII) at:
FII profile on
|Coverage Team |11B |
|QCA |Kalyan Nandy |
|Lead Analyst |Priti Dhanuka |
|Analyst |Ananya Sarkar |
|Copy Editor |Ananya Sarkar |
|Content Ed. |Priti Dhanuka |
|No. of brokers reported/Total brokers |8/8 |
|Reason for Update |Earnings |
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May 24, 2013
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