Balanced View on Franklin - Analyst Blog

By Zacks Equity Research,

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We have reiterated our Neutral recommendation on Franklin Resources Inc. ( BEN ) based on its impressive earnings performance and prudent expense management. The results outpaced the Zacks Consensus Estimate.

In July, Franklin reported fiscal third-quarter 2012 earnings of $2.12 per share, surpassing the Zacks Consensus Estimate of $2.04 per share. However, results lagged earnings of $2.32 in the prior quarter and $2.26 in the prior-year quarter. Better-than-expected results were due to lower operating expenses, reflecting prudent expense management by Franklin. Yet, reduced level of AUM was a headwind in the quarter. Moreover, lower revenues were a dampener.

Earlier in September, Franklin reported preliminary assets under management (AUM) of $731.0 billion by its subsidiaries for the month of August 2012. The company's results witnessed a rise of 1.7% from $718.7 billion as of July 31, 2012. Moreover, it increased 2.0% from $716.4 billion as of August 31, 2011.

Among Franklin's peers - Invesco Ltd. ( IVZ ) also announced a 1.5% rise in its preliminary month-end AUM for the month of August 2012. The company's AUM for the reported month was $669.7 billion compared with $659.5 billion at the end of July. The increase in Invesco's AUM was a result of encouraging market returns and total net inflows.

Franklin is strategically augmenting and expanding its foothold. Recently, Franklin announced the acquisition of the controlling stake in K2 Advisors Holdings LLC (K2), an independent fund of hedge funds solutions provider. The purchase of K2 will assist Franklin in improving and expanding its alternative investments and multi-asset solutions platforms. Such strategic initiatives would help Franklin in providing world-class investment solutions to its clients and auger well for worldwide expansion.

Though prior to the third fiscal quarter ended June 30, 2012, financial markets provided overall positive returns and volatility decreased along with subdued negative sentiments experienced during the fourth quarter of fiscal 2011, yet the recovery stalled and volatility increased during the third fiscal quarter amid continued investor concerns related to the European sovereign debt crisis and the global economy. The ongoing market concerns are likely to result in continued volatility. Moreover, uncertainties regarding economic stabilization and improvement remain in the foreseeable future.

A strong balance sheet and recently completed acquisitions are expected to boost the upcoming financial results of the company, though the regulatory restrictions and turbulence in global markets, along with the sluggish economic recovery, could mar the AUM growth while increasing its costs.

We believe that the risk-reward profile of Franklin is currently balanced and hence, we have reiterated our Neutral recommendation on its shares. Franklin currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

FRANKLIN RESOUR (BEN): Free Stock Analysis Report
INVESCO LTD (IVZ): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Stocks: BEN , IVZ

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