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Analyst Blog

On Sep 24, 2013, we reaffirmed our Neutral recommendation on Federated Investors, Inc. (FII - Analyst Report), based on its significant growth potential in the long run, given its fairly liquid balance sheet and diversified asset as well as product mix. However, persistent regulatory pressures, slow global economic growth and a low-interest rate environment are expected to keep earnings under pressure in the upcoming quarters.

Why Neutral?

After the evaluation of Federated’s expected continuing cash flow from operations, and its ability to obtain additional financing arrangements and issue debt or stock, we believe that the company will have sufficient liquidity to meet its present as well as reasonably foreseeable cash needs. Federated boasts a strong liquidity position with cash and other investments of $303 million at the end of second-quarter 2013.

We view Federated as a sound asset for yield-seeking investors based on its capital deployment activities. In Jul 2013, Federated declared a 4% hike in its quarterly dividend. Based on its competitive financial performance and earnings, Federated is on track to fulfill its commitment of returning shareholders’ value.

However, Federated’s second-quarter 2013 earnings per share of 39 cents lagged the Zacks Consensus Estimate by a penny. This also compares unfavorably with the prior-quarter earnings of $0.41, though it came in line with the year-ago quarter. Lower-than-expected results were driven by a decline in the top line due to an increase in voluntary fee waivers.

Over the last 60 days, the Zacks Consensus Estimate for 2013 decreased 4.9% to $1.56 whereas for 2014 it declined by 1.7% to $1.75 per share. Currently, Federated carries a Zacks Rank #3 (Hold).

Investment Managers to Consider

Some investment managers that are worth considering include GAMCO Investors, Inc. (GBL - Snapshot Report) with a Zacks Rank #1 (Strong Buy), while Artisan Partners Asset Management Inc. (APAM - Snapshot Report) and Noah Holdings Limited carry a Zacks Rank #2 (Buy).

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