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Why Waddell & Reed Hit 52-Week Low on In-line Q4 Earnings

Shares of Waddell & Reed Financial Inc.WDR tumbled more than 14% and touched a 52-week low, following the release of fourth-quarter 2015 results before the market opened. Earnings of 76 cents per share came in line with the Zacks Consensus Estimate. However, the reported figure was down 21.6% year over year.

We believe the drastic plunge in Waddell & Reed's stock price depicts heightened concerns regarding the company's future performance in light of continued market volatility. Further, management's plan to evaluate cost structure in accordance with revenues indicates that the company does not expect significant rebound in top line anytime soon.

Additionally, retirement of Michael L. Avery, the president and co-portfolio manager of the Ivy Funds, Waddell & Reed Advisors Funds and Ivy Funds Variable Insurance Portfolios Asset Strategy portfolios, effective Jun 30, 2016, must have added to investors' concerns.

For 2015, earnings were $2.94 per share, lagging the Zacks Consensus Estimate of $2.98. Further, it was 20.7% below the 2014 level.

Quarterly results benefited from lower expenses and improved gross sales at Institutional channel. However, a fall in revenues and weakness in assets under management ("AUM"), along with elevated outflows, were the undermining factors.

Net income totaled $62.9 million, down 22.2% year over year. For 2015, it fell 21.6% to $245.5 million.

Details

Operating revenues fell 9.1% year over year to $361.1 million, reflecting a decline in all components. However, it surpassed the Zacks Consensus Estimate of $350 million.

For 2015, operating revenues were $1.52 billion, down 5.1% year over year. Nevertheless, it beat the Zacks Consensus Estimate of $1.49 billion.

Gross sales rose 7.4% year over year to $4.3 billion. Redemptions declined 10.8% year over year to $9.3 billion. Further, net outflows came in at $5.0 billion at the quarter-end, plunging 22.3% year over year.

At the Advisors channel , gross sales decreased 8.6% year over year to $1.2 billion. Net outflows totaled $203 million compared with net inflows of $34 million in the year-ago quarter.

At the Wholesale channel , gross sales inched down 1.8% year over year to $2.3 billion. Net outflows amounted to $4.8 billion, an improvement from net outflows of $6.1 billion recorded in the prior-year quarter.

Gross sales at the Institutional channel were $733 million, surging substantially from $317 million in the year-ago quarter. However, the segment witnessed net outflows of $26 million, down significantly from $346 million in the prior-year quarter.

Operating expenses fell 3% year over year to $269.7 million. The fall was mainly led by decline in all expense components except compensation and related costs.

Operating margin was 25.3%, down from 30.0% a year ago.

As of Dec 31, 2015, AUM totaled $104.4 billion, down 15.6% from Dec 31, 2014, due to substantial rise in net outflows and unfavorable market action.

As of Dec 31, 2015, the company's cash and cash equivalents as well as investment securities totaled $850.2 million. Moreover, long-term debt totaled $190.0 million and stockholders' equity was recorded at $846.4 million.

Share Repurchase

In the reported quarter, Waddell & Reed bought back 520.2 million shares for $17.1 million. Overall, the company returned $52.8 million to its shareholders in the form of dividends and share repurchases during the fourth quarter.

Our View

Waddell & Reed's strained top line and persistent rise in outflows raise concerns about its prospects. Also, elevated expense levels, a competitive landscape and unfavorable market conditions are anticipated to trouble its financials in the near term.

However, the company remains well positioned for future growth, backed by its constant efforts toward development. Moreover, a strong balance sheet and effective capital deployment activities will likely work in its favor.

Currently, Waddell & Reed holds a Zacks Rank #5 (Strong Sell).

Performance of Other Investment Managers

BlackRock, Inc.'s BLK fourth-quarter 2015 adjusted earnings lagged the Zacks Consensus Estimate. Lower-than-expected quarterly results were led by an increase in operating expenses, partially offset by a rise in revenues.

Affiliated Managers Group Inc.'s AMG fourth-quarter 2015 economic earnings surpassed the Zacks Consensus Estimate. Results benefited from a decrease in operating expenses, partially offset by lower revenues.

Janus Capital Group, Inc. JNS recorded a positive earnings surprise of 4.17% in fourth-quarter 2015. Higher revenues and increase in AUM were the positives. However, elevated operating expenses were an undermining factor.

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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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