Federated Investors Inc.
) reported third-quarter 2012 earnings per share (EPS) of 43
cents, marching ahead of the Zacks Consensus Estimate by 2 cents.
The earnings also compared favorably with the prior-year
quarter's earnings of 37 cents.
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Better-than-expected results were driven by higher top-line
growth, aided by decline in voluntary fee waivers. Moreover, a
rise in fixed income and equity assets were the positives for the
quarter. Yet, results were partially impacted by escalated
Including the recognition of insurance proceeds in the quarter,
which reduced pre-tax operating expenses by $17.3 million, net
income came in at $55.8 million or 54 cents per share.
Performance in Detail
Total revenue climbed 11% year over year to $238.5 million,
driven by a decrease in voluntary fee waivers and enhanced
fixed-income and equity assets. Yet, the revenue reported was
below the Zacks Consensus Estimate of $242 million.
During the reported quarter, Federated derived 47% of its revenue
from money market assets, 52% from fluctuating assets (31% from
equity assets and 21% from fixed-income assets) and the remaining
1% from other products and services.
Total operating expenses jumped 1% year over year to $148.4
million in the quarter. The rise in expenses primarily reflects
higher distribution costs and increased compensation and related
As of September 30, 2012, total AUM was $364.1 billion, up 4%
from $351.7 billion as of September 30, 2011. Average managed
assets were $360.9 billion, up 3% from $348.8 billion in the
At quarter end, fixed-income assets improved 20% year over year
to record $51.4 billion. Equity assets came in at $35.4 billion,
rising 26% year over year.
However, money market mutual fund assets were $244.8 billion,
marginally down from $245.3 billion in the year-ago quarter.
Money market assets in both funds and separate accounts were
$269.6 billion, down 1% on a year-over-year basis.
As of September 30, 2012, cash and other investments were $367.8
million, up from $322.3 million at the end of December 2011.
Total long-term debt was $415.3 million, down from $429.2 million
as of December 31, 2011.
Capital Deployment Update
In the third quarter of 2012, Federated repurchased 152,244
shares of Federated class B common stock for $3.0 million.
Concurrent with the earnings release, the Board of Federated
declared a quarterly dividend of 24 cents per share and a special
dividend of $1.51 per share. The dividends will be paid on
November 15, 2012 to shareholders of record as of November 8,
However, due to the use of the two-class method for calculating
EPS, the special dividend is anticipated to reduce fourth-quarter
2012 EPS by approximately 4 cents and full-year 2012 EPS by about
Developments during the Quarter
In September 2012, Federated and
) closed a deal under which, Federated acquired assets worth $929
million from Performance Funds Trust, a wing of Trustmark.
Increased assets under management furnish Federated with various
new fund offerings that would benefit its clients.
This deal marks Federated's third consecutive completed
transaction of acquiring assets since the beginning of 2012.
Earlier in September, Federated also acquired money market assets
worth $4.4 billion from four Fifth Third money market funds of
Fifth Third Asset Management Inc. (FTAM), the asset management
Fifth Third Bancorp
). These assets were merged into four existing Federated money
market funds, which have the same investment objectives.
Previously, in April, Federated completed the expansion of its
operation in United Kingdom by acquiring London-based Prime Rate
Capital Management, LLP from Matrix Group Limited. The firm
provides institutional liquidity and fixed-income products. UCITS
(Undertakings for Collective Investments in Transferable
Securities) products, offered by Prime Rate, include Prime Rate
Sterling Liquidity Fund, Prime Rate Euro Liquidity Fund and Prime
Rate US Dollar Liquidity Fund.
We believe Federated has the potential for significant growth in
the long run, given its fairly liquid balance sheet and a
diversified asset as well as product mix. Moreover, investors
increased demand for the company's wide range of income-oriented
products will help it bolster profitability.
However, persistent regulatory pressures, slow global economic
growth and a low-interest rate environment is expected keep
Federated's earnings under pressure in the upcoming quarters.
Shares of Federated currently retain a Zacks #2 Rank, which
translates into a short-term Buy rating. However, considering the
fundamentals, we maintain a 'Neutral' recommendation on the