Franklin Outpaced Estimates

Franklin Resources Inc.’s ( BEN - Analyst Report ) fiscal first-quarter 2012 earnings of $2.20 per share were above the Zacks Consensus Estimate of $2.10 per share. Moreover, the results outpaced earnings of $1.88 per share in the prior quarter, but lagged earnings of $2.23 per share reported in the prior-year quarter.

Results improved due to lower operating expenses and higher assets under management (AUM) on a sequential basis. The lower top line was a partial offset.

Net income was $480.8 million in the quarter compared with $416.0 million in the prior quarter and $501.2 million in the prior-year quarter.

Quarterly Performance in Detail

Total operating revenue decreased 7% sequentially to $1.7 billion, primarily attributed to lower investment management fees and reduced sales and distribution fees. However, revenue was modestly in line with the Zacks Consensus Estimate and the sequentially preceding quarter.

Investment management fees decreased 10% sequentially but climbed 1% year over year (y/y) to $1.1 billion, while sales and distribution fees dropped 6% sequentially and 5% y/y to $524 million. Shareholder servicing fees remained flat sequentially, increasing 5% y/y to $75.4 million.

Total operating expenses declined 7% sequentially to $1.1 billion, mainly due to a fall in sales, distribution and marketing expenses, information systems and technology expenses, lower occupancy and lower general, administrative and other expenses and decreased compensation and benefits. However, operating expenses were up 3% y/y, mainly due to significantly higher administrative and general expenses.

As of December 31, 2011, total AUM was $670.3 billion, up from $659.9 billion as of September 30, 2011, attributed to market appreciation, partly offset by net new outflows. However, AUM remained flat on a year-over-year basis, as market depreciation of $27.4 billion offset the net new flows of $17.6 billion and $12.5 billion from acquisitions.

Simple monthly average AUM during the quarter decreased 6% sequentially and increased 3% y/y to $675 billion. Net new outflows were $15.6 billion versus inflows of $3.1 billion in the prior quarter and $3.2 billion in the prior-year quarter.

Balance Sheet Position

As of December 31, 2011, cash and cash equivalents and investments were $9.1 billion compared with $9.4 billion as of September 30, 2011, while total stockholders' equity was $8.9 billion versus $9.1 billion as of September 30, 2011.

During the reported quarter, Franklin repurchased 3.0 million shares of its common stock for a total cost of $290.9 million. As of December 31, 2011, Franklin had 215.9 million shares of common stock outstanding versus 217.7 million shares as of September 30, 2011.

Peer Performance

In Franklin’s peer group, Invesco Ltd.’s ( IVZ - Analyst Report ) fourth-quarter adjusted earnings came in at 42 cents per share, just a cent ahead of the Zacks Consensus Estimate. However, this compares unfavorably with the adjusted earnings of 44 cents in the prior-year quarter. On a GAAP basis, earnings came in at 44 cents per share compared with 37 cents in the year-ago quarter.

Invesco’s earnings deteriorated over the prior-year quarter, primarily due to lower net revenue and higher operating expenses. However, improved interest and dividend income and lower interest expense were among the positives. The company’s assets under management also remained healthy during the quarter.

Our Take

Franklin's global footprint is an exceptionally favorable strategic point as its AUM is well diversified. The company is also poised to benefit from its strong balance sheet. Moreover, the completed acquisitions in calendar year 2011 are expected to strengthen its financials. However, the regulatory restrictions and sluggish economic recovery could mar the AUM growth and increase costs.

Franklin currently retains its Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Considering the company’s business model and fundamentals, we have a long-term “Neutral” recommendation on the stock.