FII Beats on Lower Revenues - Analyst Blog

Federated Investors Inc. (FII) reported fourth quarter earnings per share of 45 cents, which surpassed the Zacks Consensus Estimate by 2 cents, and missed the year-ago earnings of 51 cents. However, the reported earnings outpaced 42 cents per share reported in the prior quarter.

Results reflected an increase in fixed income equity funds and fixed income assets, decrease in operating expenses and a decline in the amortization of deferred sales commissions. This was partly offset by an increase in voluntary fee waivers, reduced top-line growth and lower assets under management (AUM) on a year-over-year basis.

Net income increased 7.7% from the prior quarter, but decreased 11.9% year over year to $46.4 million. During the fourth quarter 2010, Federated recorded non-cash impairment charge of $3.2 million or 2 cents per diluted share after tax related to intangible assets associated with the prior-year acquisition.

For fiscal year 2010, Federated reported net income of $1.73 per share, up from the Zacks Consensus Estimate of $1.69. However, this compares unfavorably with $1.92 reported in the prior year. Net income came in at $179.1 million, down from $197.3 million in the prior year.

Performance in Detail

Total revenue decreased 7% year over year, but increased 1% from the prior quarter to $245.3 million and was below the Zacks Consensus Estimate of $251.0 million. The decrease was primarily attributable to an increase in voluntary fee waivers related to certain money market funds in order to maintain positive or zero net yields.

Alongside, revenue declined due to lower average money-market managed assets that were partially offset by the impact of increased average fixed-income and equity managed assets.

For full-year 2010, total revenue was $951.9 million, down 19% year over year, and also missed the Zacks Consensus Estimate of $958.0 million.

During the reported quarter, Federated derived 50% of its revenue from money market assets, 49% from fluctuating assets (31% from equity assets and 18% from fixed-income assets) and 1% from other products and services.

Total operating expenses decreased 7% year over year to $166.3 million, primarily reflecting lower general, administrative and distribution expenses due to the higher fee-waiver related reductions and lower average money market managed assets. For fiscal year 2010, Federated reported operating expenses of $642.2 million, down 24% year over year.

Assets Position

As of December 31, 2010, total AUM was $358.2 billion, down 8% from $389.3 billion as of December 31, 2009 and up from $341.3 billion reported as of September 30, 2010. Average managed assets were $345.7 billion, down from $388.1 billion in the year-ago quarter and up from $338.6 billion in the prior quarter.

At quarter-end, fixed-income assets increased 20% year over year and 1% from prior quarter to $40.7 billion. Equity assets came in at $30.8 billion, surged 4% year over year and 6% from the prior quarter. However, money market assets in both funds and separate accounts declined by 12% year over year, but increased 6% to $276.0 billion from the prior quarter.

Money market mutual fund assets were $244.8 billion in the quarter, down 13% year over year, but up 5% sequentially.  As of December 31, 2010, assets included $14.1 billion acquired from SunTrust Banks Inc.'s products during the and fourth quarters of 2010.

As of December 31, 2010, cash and other short-term investments were $333.6 million, up from $122.0 million at the end of December 31, 2009. However, total long-term debt was $365.7 million, up from $118.6 million at the end of December 31, 2009.

Share Repurchase and Dividend Update

During the reported quarter, Federated Investors purchased 222,226 shares of Federated Class B common stock for $5.0 million. For full-year 2010, the company purchased 659,675 shares of Federated class B common stock for $14.2 million.

The board of Federated Investors declared a quarterly dividend of 24 cents per share, which will be payable on February 15, 2011 to shareholders of record as of February 8, 2011.

Competitor Performance

Federated's closest competitor, BlackRock Inc.'s (BLK) fourth quarter 2010 operating earnings of $3.42 per share were substantially ahead of the Zacks Consensus Estimate of $2.90. This also surpassed the prior quarter's earnings of $2.75 and the prior-year quarter's earnings of $2.39.

Better-than-expected results were primarily aided by a strong growth in top line, benefits of the BGI acquisition and improved equity markets, which were partially offset by higher operating expenses.

Our Take

The financial service industry had been the hardest hit zone during the economic crisis in 2008 and Federated was one to be jolted by the credit crunch. However, the company is in a restructuring and recovering phase, hence the bumps in the ride are justified at the moment.

Nevertheless, the near-term outlook remains cautious and we wait for a strong and steady rebound that will help to increase market activity and regenerate client demand. Overall, the company has the potential for substantial growth in the long run, given its fairly healthy balance sheet, the firm's cost-cutting initiatives and a diversified asset and product mix. 

Federated currently retains its Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we are maintaining our Neutral recommendation on the stock.

 
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