Janus Capital Stays Neutral

We are reiterating our Neutral recommendation on Janus Capital Group Inc. (JNS - Analyst Report), backed by the company’s better-than-expected first-quarter 2011 earnings.

Janus Capital’s first-quarter 2011 earnings attributable to common shareholders came in at 24 cents per share, surpassing the Zacks Consensus Estimate by 4 cents. The result was aided by higher assets under management (AUM).

First-quarter 2011 results included 3-cent per share non-operating charge due to the early retirement of debt. Excluding this charge, the company reported earnings of 21 cents, compared to 36 cents in the prior quarter and 17 cents in the year-ago quarter.

As of March 31, 2011, Janus Capital reported AUM of $172.5 billion, compared with $167.3 billion in the prior quarter and $160.0 billion in the prior-year quarter. Average AUM inched up 3.1% sequentially and 7.8% year over year to $172.5 billion.

After the successful capital structuring in July 2009, Janus Capital maintains a healthy balance sheet. The company’s cash flow position remains modestly firm, along with increased total inflow of assets. However, Janus Capital witnessed increased market volatility and heightened outflow of $10.8 billion in 2010, primarily driven by 10.5 billion of outflows in mathematical strategies. However, in the first quarter of 2011, the company reported $2.7 billion of net outflow, down from $4.8 billion in the prior quarter.

Therefore, going ahead, we expect the company’s multi-boutique approach to provide style-specific expertise across an array of its strategies, including growth, value and risk-managed equities, fixed income and alternatives.

Due to the strengthening of the balance sheet resulting from early retirement of debt, Janus Capital’s board of directors has significantly increased the regular quarterly cash dividend to 20 cents per share from 4 cents in 2010. Considering current business operations and future investments, the company has focused on returning capital to investors. Such actions would boost investors’ confidence in the company.

Janus Capital has taken quite a number of initiatives to strengthen its businesses. The company is currently focused on growing its fixed income business including trading and investment. It launched Global High-Yield Fund or Global Investment Grade, Global Bond Fund, and an Emerging Markets Equity strategy in 2010 to further develop offerings of products of interest for the non-U.S. clients. Furthermore, investments in 2011 will be particularly focused on brand, fixed income and Asian expansion. We expect these measures to aid top-line expansion in the upcoming quarters.

On the flip side, Janus Capital continues to experience lower inflows than expected from the money market that offsets growth from other markets. The weakness is primarily due to lower-than-expected interest rates, which in turn, resulted in a shift of the clients toward the equity and fixed income markets for higher yields and income. Consequently, the company’s substantial exposure to the money market can hinder the achievement of targeted goals in the long run.

Furthermore, the majority of Janus Capital’s total assets are in equities, which makes it vulnerable to volatility in the equity market. The performance of fundamental equity funds has been volatile in the past few quarters due to fluctuation in sales as well as overall redemptions while remaining challenging in the first quarter of 2011. This has led to acceleration in net outflows, which were $0.5 billion compared with long-term net inflows of $1.3 billion in the first quarter of 2010. Non-improvement in performance of these funds will not only increase outflows but also affect the company through lower performance fees in 2012, thereby hampering its overall growth.

Nevertheless, given its healthy balance sheet, dividend increment and total AUM growth, we believe Janus has the potential to outperform its peer group in the long run.

Janus Capital currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. The company’s peer – Franklin Resources Inc. (BEN - Analyst Report) retains a Zacks #2 Rank (a short-term ‘Buy’ rating).

Read the full analyst report on JNS

Read the full analyst report on BEN