Franklin Runs Ahead of Estimates - Analyst Blog

Franklin Resources Inc.'s (BEN) first quarter 2011 earnings of $2.23 per share outpaced the Zacks Consensus Estimate of $1.91 per share. Results reflected strong growth in revenue and higher assets under management (AUM), partially offset by increased operating expenses.

Moreover, the results were ahead of earnings of $1.54 per share in the prior-year quarter and $1.65 per share in the prior quarter.

Earnings Performance in Detail

Total operating revenue increased 23.0% year over year to $1,700.3 million, primarily driven by higher investment management fees, increased sales and distribution fees and increased shareholder servicing fees. Further, revenue surpassed the Zacks Consensus Estimate of $1,668.0 million.

In first-quarter 2011, investment management fees increased 29% year over year to $1,040.9 million, while sales and distribution fees grew 18% year over year to $577.8 million. Shareholder servicing fees surged 4% year over year to $72.1 million.

Total operating expenses increased 14% year over year to $1,041.1 million in the quarter, mainly due to an increase in sales, distribution and marketing expenses, information systems and technology expenses and higher compensation and benefits. These increases were partially offset by lower general, administrative and other expenses.

In the first quarter of 2011, total AUM was $670.7 billion, up from $644.9 billion as of September 30, 2010 and $553.5 billion as of December 31, 2009, due to higher inflows. Simple monthly average AUM during the quarter increased 8.4% sequentially and 22.6% year over year to $655.6 billion.

At the end of the quarter, net new flows were $3.2 billion versus $19.4 billion in the prior quarter and $14.3 billion in the prior-year quarter.

Balance Sheet Position

With effect from October 1, 2010, Franklin adopted new accounting guidance related to the consolidation of variable interest entities.  The newly adopted guidance increased cash and cash equivalents and investments by $1.1 billion and debt outstanding to $1.2 billion as of December 31, 2010.

As of December 31, 2010, cash and cash equivalents and investments were $8.0 billion compared with $6.8 billion as of September 30, 2010, while total stockholders' equity was $8.1 billion versus $7.7 billion as of September 30, 2010.

During the reported quarter, Franklin repurchased 1.7 million shares of its common stock for a total cost of $198.5 million. As of December 31, 2010, Franklin had 223.3 million shares of common stock outstanding versus 224.0 million shares as of September 30, 2010.

Competitor Performance

In Franklin's peer group, Invesco Limited's (IVZ) earnings as of December 31, 2010, came in at 44 cents per share, 4 cents ahead of the Zacks Consensus Estimate of 40 cents. This also compares favorably with earnings of 25 cents in the prior-year quarter.

The increase in earnings in the prior-year quarter was attributable to a surge in net revenues resulting from inclusion of the retail asset management business of Morgan Stanley (MS), partially offset by a rise in operating expenses.

Our Take

Franklin's global footprint is an exceptionally favorable strategic point, since its AUM is well diversified. This coupled with a strong balance sheet is expected to cushion the company.

Franklin is not immune to the volatile economic environment, which has been made worse by the costly regulatory environment following the Reform Act. The regulations could negatively affect the company's AUM, increase costs and affect its results.

Franklin currently retains its Zacks #3 Rank, which translates to a short-term Hold rating. Considering the fundamentals, we are maintaining a Neutral' recommendation on the stock for the long term.

 
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