Federated Lags Ests, Rev Down

Federated Investors Inc. (FII - Analyst Report) reported fourth-quarter 2011 earnings per share of 36 cents, lagging the Zacks Consensus Estimate by 3 cents per share. The earnings missed the prior quarter’s earnings by a penny, and were also below earnings of 45 cents reported in the year-ago quarter.

Results reflected a lower top-line growth and an increase in voluntary fee waivers on a year-over-year basis. This was partly offset by a rise in fixed income, equity and money market assets, higher assets under management (AUM) and a decline in total operating expenses.

Net income in the quarter was $36.9 million, down from $38.3 million reported in the prior quarter and $46.4 million in the prior-year quarter.

For full year, net income was $150.9 million or $1.45 per share, down from $179.1 million or $1.73 per share in the prior year. Full year earnings per share were also below the Zacks Consensus Estimate by 4 cents.

Performance in Detail

Total revenue inched up 1% sequentially to $216.4 million, driven by an increase in money market and fixed-income assets, partially offset by a fall in revenue related to changes in equity asset mix. However, revenue declined 12% year over year (y/y), owing to an increase in voluntary fee waivers coupled with change in the mix of average equity assets. Yet, these decreases were partly offset by a rise in revenue from increased average money market and fixed-income assets. Moreover, the revenue reported was below the Zacks Consensus Estimate of $225.0 million.

During the reported quarter, Federated derived 46% of its revenue from money market assets, 53% from fluctuating assets (31% from equity assets and 22% from fixed-income assets) and 1% from other products and services.

For full year, total revenue was $895.1 million, down 6% year over year. Also, the revenue missed the Zacks Consensus Estimate of $956.0 million.

Total operating expenses climbed 5% sequentially to $154.5 million in the quarter, primarily reflecting higher distribution and travel related fees. However, expenses plummeted 7% y/y, driven by lower distribution and other expenses.

Assets Position

As of December 31, 2011, total AUM was $369.7 billion, up 5% from $351.7 billion as of September 30, 2011 and up 3% from $358.2 billion reported as of December 31, 2010. Average managed assets were $358.3 billion, up 3% from $348.8 billion in the prior quarter and up 4% from $345.7 billion in the prior-year quarter.

At quarter end, fixed-income assets increased 4% sequentially and 10% y/y to $44.8 billion. Equity assets came in at $30.9 billion, rising 10% sequentially and slightly up on a y/y basis. Further, money market assets in both funds and separate accounts climbed 5% sequentially and 3% y/y to $285.1 billion. Money market mutual fund assets were $255.9 billion in the quarter, up 4% sequentially and 5% y/y. 

As of December 31, 2011, cash and other investments were $322.3 million, down from $333.6 million at the end of December 31, 2011. Total long-term debt was $420.4 million, down from $445.5 million at the end of December 31, 2011.

Share Repurchase and Dividend Update

In full year 2011, Federated repurchased 1.5 million shares of Federated class B common stock for $28.1 million. During the fourth quarter of 2011, Federated Investors purchased 0.6 million shares of Federated Class B common stock worth $9 million.

Concurrent with the earnings release, the board of Federated Investors declared a quarterly dividend of 24 cents per share. The dividend will be paid on February 15, 2012 to shareholders of record as of February 8, 2012.

Our Take

We expect regulatory backdrop and sluggish global economic growth to keep earnings under pressure. However, Federated has the potential for substantial growth in the long run, given its fairly healthy balance sheet and a diversified asset as well as product mix. Nevertheless, the near-term outlook remains cautious and we are expecting a strong and steady rebound, which will help to increase market activity and regenerate client demand.

Among Federated’s peers, The Blackstone Group (BX - Snapshot Report) will report its fourth-quarter 2011 earnings on February 2, 2012.

Federated currently retains its Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Considering the fundamentals, we also maintain our “Neutral” recommendation on the stock.

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