Higher expenses dragged results of Fortress Investment Group LLC ( FIG ) and it consequently failed to deliver a positive earnings surprise. On Thursday, the company reported third quarter 2014 pre-tax distributable earnings of 12 cents per share, missing the Zacks Consensus Estimate of 20 cents. Also, the reported figure was marginally below the prior-year quarter figure of 13 cents per share.
Despite such earnings miss, shares of Fortress Investment gained 3.3% -- closing at $7.52 on Friday.
Perhaps the speculation surrounding Fortress Investment going private led to this positive sentiment. In response to an analyst's question in the Q3 conference call, CEO Randy Nardone stated that management may consider such a move. As part of a related statement, he mentioned "when the opportunity presents itself, we'll definitely think about that. It's obviously something at these valuations as I alluded to in my opening remarks, it does seem like a pretty good value. So it's something we think about, and as we think about many things, going forward."
Perhaps the expectation of a premium to the current market price if it goes private has raised hope among the investors. At least, those who lost significantly since the IPO of this stock, will get a chance to recover the loss to some extent with the premium.
Results were primarily affected by elevated expenses. However growth in revenues and enhanced management fee paying assets under management (AUM) were among the positives. Segment wise, compared with the prior-year quarter, Credit and Private equity business recorded lower pre-tax DE, Liquid Hedge Funds reported lower pre-tax DE loss while Logan circle reported pre-tax DE loss, stable with the prior-year quarter.
Pre-tax distributable earnings stood at $55 million, down 15.4% year over year. On a GAAP basis, net income came in at $10 million, down significantly from the prior-year quarter net income of $101 million.
Total segment revenue surged 33% year over year to $237 million. The increase was mainly attributable to higher management fees and incentive income. However, it lagged the Zacks Consensus Estimate of $239 million.
Management fees summed $149 million, up 9.6% from the prior-year quarter. The rise was mainly driven by increased management fees from the Credit Hedge Funds, Logan Circle, Liquid Hedge Funds and Permanent Capital Vehicles. However, lower management fees from the Private Equity Funds partially offset the increase.
Incentive income was $88 million, significantly up from $42 million in the prior-year quarter. The increase was primarily attributable to higher incentive income from the Credit PE Funds and Permanent Capital Vehicles and reduced reversal of accrued incentive income from the Liquid Hedge Funds in the third quarter of 2013. The increase was partially offset by decline in incentive income from the Credit Hedge Funds and Private Equity Funds.
Total segment expenses increased 37.2% year over year to $169 million. This upswing was primarily driven by higher operating expenses as well as profit sharing compensation expenses.
As of Sep 30, 2014, management fee paying AUM rose 14% year over year to $66.0 billion. Notably, the Logan Circle division witnessed net client inflows of $2.2 billion. Management noted that the quarter marked "an all-time high" AUM.
As of Sep 30, 2014, total uncalled capital totaled $7.5 billion out of which approximately $5.4 billion is available for common investment purposes.
As of Sep 30, 2014, cash and cash equivalents were $332 million, compared with $364.6 million as of Dec 31, 2013. Debt obligation stood at $75 million in the quarter. Notably, there was no debt obligation outstanding as of Dec 31, 2013.
Fortress Investment's steady organic growth keeps us optimistic. However, the company's failure to control its expenses and the persistent macroeconomic headwinds across the industry keep us apprehensive.
Currently, Fortress Investment carries a Zacks Rank #3 (Hold).
Other Investment Management Firms
Ameriprise Financial Inc.'s ( AMP ) third-quarter 2014 adjusted operating earnings surpassed the Zacks Consensus Estimate owing to significant improvement in AUM and assets under administration. BlackRock, Inc. ( BLK ) and SEI Investments Co. ( SEIC ) also delivered positive earnings surprises on the back of higher revenues.
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