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Janus Capital Group Inc.’s (JNS - Analyst Report) fourth-quarter 2011 earnings per share attributable to common shareholders came in at 19 cents, ahead of the Zacks Consensus Estimate by 4 cents per share. However, results compared unfavorably with 24 cents in the year-ago quarter and 21 cents in the prior quarter.

Lower topline growth and net outflows were the negatives for the quarter. However, decline in operating expenses reflected better expense management.

For the full year, net income totaled $142.9 million or 78 cents per share, compared with $159.9 million or 88 cents per share in the prior year. However, earnings outpaced the Zacks Consensus Estimate of 75 cents per share.

Behind the Headlines

Total revenue plunged 9.0% sequentially and 21.8% year over year (y/y) to $215.6 million in the fourth quarter. The sequential and y/y decline reflects negative performance fees driven by underperformance of certain mutual funds coupled with lower investment management fees. Yet the revenue figure was slightly above the Zacks Consensus Estimate of $214.0 million.

For full year, total revenue declined 3.3% year over year to $981.9 million. However, the revenue figure surpassed the Zacks Consensus Estimate of $980.0 million.

Total operating expenses decreased 10.9% sequentially and 19.4% y/y to $145.0 million, driven by lower marketing and advertising expenses, reduced distribution expenses and low employee compensation and benefits expenses. However, higher general, administrative and occupancy expenses were on the downside.

Operating margin was 32.7% compared with 31.3% in the prior quarter and 34.7% in the year-ago quarter.

Asset Position

As of December 31, 2011, Janus Capital’s reported AUM of $148.2 billion compared with $141.0 billion as of September 30, 2011, and $169.5 billion as of December 31, 2010. Average AUM decreased 4.3% sequentially and 10.8% y/y to $149.2 billion.

The sequential increase in overall assets during the reported quarter was driven by $11.2 billion of net market appreciation, partly offset by long-term net outflows of $4.0 billion. Long-term net outflows at fundamental equity and mathematical equity totaled $3.2 billion and $2.2 billion, respectively, partially offset by fixed income long-term net inflows of $1.4 billion. However, the y/y decline in AUM was mainly due to long-term net outflows of $12.2 billion and $9.1 billion of net market depreciation.

Balance Sheet

As of December 31, 2011, Janus Capital had stockholders’ equity of $1.3 billion, cash and investments of $672 million and outstanding debt of $595 million.

Janus Capital’s board of directors declared a regular quarterly cash dividend of 5 cents per share. The dividend will be paid on February 21, 2012 to shareholders of record as of February 6, 2012.

Our Take

Janus Capital faces increasing competition from its peers Calamos Asset Management Inc. (CLMS - Snapshot Report) and Waddell & Reed Financial Inc. (WDR - Analyst Report). The company has the best-in-class investment boutique with the potential for AUM and revenue along with competitive leverage growth. However, weakness in flows remains a matter of concern.

Though fixed income and global businesses are improving, headwinds persist and the company’s equity-heavy portfolio exposes it to equity market volatility. Further, a low interest rate environment affects money market business. Nevertheless, given its healthy balance sheet, we believe Janus Capital has the potential to outperform its peer group in the long run.

Janus Capital retains a Zacks #3 Rank, which translates into a short-term Hold recommendation. Moreover, considering the fundamentals, we are maintaining a Neutral recommendation on the stock.

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