Acquisitions Aid Franklin's (BEN) Growth Despite Rising Costs

Franklin Resources, Inc. BEN has been growing through acquisitions, thereby enhancing its foothold and expanding its alternative investments and multi-asset solutions platforms. Yet, a higher expense base on technological advancements remains a key concern for the company.

BEN recently completed the acquisition of Lexington Partners L.P.When the acquisition was announced in November 2021, the transaction was valued at $1.75 billion. The deal has helped Franklin significantly boost its alternative asset offerings by adding more than $200 billion in aggregate alternative assets under management (“AUM”).

On Dec 31, 2021, it closed the acquisition of O’Shaughnessy Asset Management, LLC, which will further enhance its presence in the separately managed account (SMA) space. Previously, Franklin’s acquisitions of specialist investment managers like Clarion Partners, K2 Advisors and Benefit Street Partners have strengthened its investment capabilities in private debt, real estate, hedge funds and private equity, respectively.

Inorganic moves aside, its relatively strong distribution platform has increased diversification in flows across funds, vehicles and asset classes, as well as key businesses growth.  Franklin has been an early entrant in many foreign markets, enjoying a first-mover advantage. The company also tries to attract, retain and develop employees, as well as invest tactically in systems and technology, which will provide a secure and stable environment.

BEN’s rising AUM trend is also encouraging. Its AUM is witnessing a rising trend, seeing a CAGR of 19.4% over the last five fiscal years (ended fiscal 2021). The rising trend continued in the first quarter of fiscal 2022. Going forward, the OSAM and Lexington acquisitions, as well as investment in North Capital, are likely to keep supporting AUM growth. This, in turn, will drive the company's top-line expansion.

However, Franklin’sexpenses witnessed a CAGR of 16.2% over the last four years (ended fiscal 2021). Leveraging on technological advancements might result in cost upsurges and weigh on the firm’s bottom-line expansion.

Investment management fees are Franklin’s biggest revenue source, comprising about 77% for fiscal 2021. Despite a diversified character, the company’s AUM is exposed to market fluctuations and foreign-exchange translations, regulatory changes, or a sudden slowdown in overall business activities. Such changes in AUM might hurt Investment management fees and affect BEN’s financials. Notably, the company’s investment management fees have witnessed a volatile trend in the past six fiscal years (2016-2021).

Though Franklin’s capital deployment activities are commendable, its volatile earnings performance and an unfavorable debt/equity ratio compared with that of the broader industry reflect that these activities might not be sustainable.

Over the past year, shares of BEN have declined 9.2% compared with a 10.9% fall of the industry.

Image Source: Zacks Investment Research

Franklin currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Finance Stocks to Consider

Some better-ranked stocks in the finance space are Bank of Hawaii BOH and Noah Holdings NOAH. At present, both Bank of Hawaii and NOAH carry a Zacks Rank #2 (Buy).

Over the past six months, shares of NOAH have declined 35.4%, whereas the BOH stock has lost 1.7%.

Over the past 30 days, the Zacks Consensus Estimate for Bank of Hawaii's current-year earnings has been revised marginally upward, while the same for NOAH has moved 15.2% north.

A popular stock in the finance sector is Wells Fargo & Company WFC. The Zacks Consensus Estimate for WFC’s 2022 earnings has moved marginally upward over the past week. It currently carries a Zacks Rank of 3.

The company's surprise history is impressive, with earnings surpassing the Zacks Consensus Estimate in all the trailing four quarters. However, we expect Wells Fargo’s loan balance to be limited by the asset cap remaining in place in 2022, thereby hurting interest income, until it fully meets regulators’ demands regarding compliance and operational risk management.

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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.