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Federated Q3 Earnings Beat on Higher Revenues; AUM Falls

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Riding on a strong top-line performance, Federated Investors Inc.FII has delivered a positive earnings surprise of 5.0% for third-quarter 2015. Earnings per share of 42 cents beat the Zacks Consensus Estimate of 40 cents and improved 17% over the year-ago quarter.

Better-than-expected results were mainly driven by a rise in total revenue and a surge in equity and fixed income asset balances. However, these were partially offset by a decline in assets under management ("AUM"). Moreover, higher expenses were a concern.

Net income for the quarter came in at $44.1 million, increasing 17.3% year over year.

Federated Investors Inc. - Earnings Surprise | FindTheBest

Performance in Detail

Total revenue for the third quarter climbed 8% year over year to $234.3 million; however, lagging the Zacks Consensus Estimate of $240 million.

The year-over-year upsurge in revenues was attributable to a rise in average equity assets under management and reduced voluntary fee-waivers related to money market funds. Moreover, net investment advisory fees recorded a 13% year-over-year increase to $158.9 million.

During the quarter, Federated derived 33% of its revenues from money market assets and 67% from fluctuating assets (46% from equity assets and 21% from fixed-income assets).

Further, the company reported non-operating expense of $4 million in the quarter, compared with $1.4 billion recorded in the prior-year quarter, primarily due to a fall in net investment income.

Total operating expenses climbed 3% on a year-over-year basis to $160.1 million in the quarter. The rise in expenses primarily reflects elevated distribution, systems and communication, advertising and other expenses. These were, however, partially offset by a fall in professional fees and office & occupancy expenses. Notably, compensation and related expenses stood relatively stable during the quarter.

Assets Position

As of Sep 30, 2015, total AUM was $351.0 billion, marginally down from $352.3 billion as of Sep 30, 2014. Average managed assets were $351.9 billion, up 1% from $349.2 billion in the prior-year quarter.

Money market assets were $246.9 billion, up 1% on a year-over-year basis. Money market mutual fund assets came in at $216.3 billion, up 1% year over year.

Moreover, both equity and fixed income assets increased during the quarter. While equity assets came in at $52 billion, up 3% year over year; fixed-income assets rose 2% year over year to $52.1 billion.

As of Sep 30, 2015, cash and other investments were $321.8 million, up from $297.3 million as of Dec 31, 2014. Total long-term debt was $368.9 million compared with $377.8 million as of Dec 31, 2014.

Capital Deployment Update

During the quarter, Federated declared a dividend of 25 cents per share, payable on Nov 13 to shareholders of record on Nov 6.

Additionally, the company repurchased 539,805 shares of Federated class B common stock for $16.4 million.

Our Viewpoint

Federated exhibits substantial growth potential, given its diverse asset and product mix, coupled with a strong liquidity position. Moreover, strategic acquisitions are expected to augur well for the company.

Despite the positives, declining assets under management could pose a major threat to the company's financials. Besides, stringent regulations and prevalent low interest rate environment will likely continue to exert pressure on the company's earnings.

Currently, Federated carries a Zacks Rank #5 (Strong Sell).

Among other investment managers, Waddell & Reed Financial, Inc. WDR , Invesco Ltd. IVZ and Legg Mason Inc. LM are scheduled to release September quarter-end earnings results on Oct 27, Oct 29 and Oct 30, respectively.

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INVESCO LTD (IVZ): Free Stock Analysis Report

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FEDERATED INVST (FII): 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.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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