We have reiterated our Neutral recommendation on
Federated Investors Inc.
) following a detailed analysis of the company's fundamentals in
light of the current economic environment. Also, the opportunistic
expansion efforts by the company, and the fact that it is on track
to expand globally, contributed to this stance.
In April 2012, Federated completed the acquisition of London-based
Prime Rate Capital Management, LLP - a provider of institutional
liquidity and fixed-income products - from Matrix Group Limited.
The acquisition further increased the company's European presence
with UK-domiciled UCITS (Undertakings for Collective Investment in
Transferable Securities) products.
Federated came up with the plan of buying more mutual fund assets
to enhance its business in strategically important segments to
mitigate the effects of the lingering low interest rate environment
and the increasing number of regulations. Hence, in September 2012,
the company acquired money market assets worth $4.4 billion from
FTAM - the asset management subsidiary of
Fifth Third Bancorp
Moreover, in the same month, Federated acquired assets worth
$929 million from Performance Funds Trust, a wing of Trustmark
Corporation. Increased assets under management (AUM) furnished the
company with various new fund offerings that would benefit its
clients going forward.
Moreover, Federated boasts a strong liquidity position to meet its
present as well as future financial needs. Cash and investments
coupled with the cash flows from operations and available cash will
help take advantage of acquisition opportunities and use these for
other general corporate purposes. Further, the company's varied
business mix, which includes products that are functional under
diverse market conditions, is beneficial for the company.
Federated remains an attractive pick for yield-seeking investors
due to its extensive capital deployment activities. In the first
half of 2012, Federated repurchased 0.1 million shares of Federated
class B common stock for $2.3 million. The authorization of the new
share buyback program, slated to expire on March 1, 2013, and
stable dividend payments raise our hopes for an enhanced investor
confidence in the company.
On the flip side, Federated was significantly impacted by the
negative developments in the global financial markets over the past
years. Volatile equity markets and sluggish economic environment
are expected to keep AUM, flows and margins under pressure. Even
though the situation is slowly easing, we do not expect stability
in the near term.
Further, the uncertain regulatory environment is expected to
significantly impact Federated's financials. In January 2010, the
Securities and Exchange Commission (SEC) adopted extensive
amendments to Rule 2a-7 of the Investment Company Act of 1940 aimed
at enhancing the resiliency of money market funds.
Further, the SEC is set to propose a new body of regulations for
money market funds in the near future. When enacted, these
are expected to be unfavorable to Federated's money market fund
business and could significantly affect its financials.
In addition, the low-interest rate environment continues to
adversely impact Federated's money market funds. Over the last
several quarters, the Federal Reserve left the near-zero federal
funds rate unchanged and short-term interest rates continued to be
at their all-time lows. We believe that the prevailing low interest
rates will continue to negatively impact the company's operations.
FEDERATED INVST (FII): Free Stock Analysis
FIFTH THIRD BK (FITB): Free Stock Analysis
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The risk-reward profile of Federated is currently balanced and
hence, we have reiterated our Neutral recommendation on its shares.
Federated currently retains its Zacks #2 Rank, which translates
into a short-term Buy rating.