Janus Misses Estimate on Lower Fees

Janus Capital Group Inc.’s ( JNS - Analyst Report ) first-quarter 2012 earnings per share attributable to common shareholders came in at 12 cents. However, results included a charge of 3 cents per share related to the debt tender and a change in the long-term incentive compensation forfeiture estimate.

Excluding that, the company would have earned 15 cents per share. This just fell short of the Zacks Consensus Estimate of 16 cents per share.

Notably, including an operating benefit of 5 cents per share from the reversal of previously accrued compensation expenses, the company had earned 19 cents per share in the prior quarter. In the year ago quarter, the company had earned 21 cents per share and this figure included a charge of 3 cents per share for early extinguishment of debt.

Lower-than-expected growth in the top line driven by lower performance fees coupled with an increase in operating expenses were the downsides in the reported quarter.

Behind the Headlines

Janus Capital’s total revenue moved up 1.3% sequentially to $218.4 million in the reported quarter. The sequential increase primarily stemmed from higher assets under management resulting from market appreciation. However, this was partially offset by an uptick in negative mutual fund performance fees. Yet the revenue figure was below the Zacks Consensus Estimate of $220.0 million.

On the other hand, operating expenses increased 11.7% sequentially to $161.9 million. The increase reflects compensation accrual reversals of $13.2 million made in the prior quarter. However, there were no compensation accrual reversals in the reported quarter. In addition to this, the company incurred higher long-term incentive compensation expenses in the reported quarter.

Operating margin was 25.9% compared with 32.7% in the prior quarter and 32.1% in the year-ago quarter.

Asset Position

As of March 31, 2012, Janus Capital’s reported AUM of $164.0 billion, up 10.7% from $148.2 billion as of December 31, 2011, but down 5.5% from $173.5 billion as of March 31, 2011. Average AUM advanced 6.5% sequentially but dropped 7.9% y/y to $158.9 billion.

The sequential increase in overall assets at Janus Capital during the reported quarter was driven by $18.3 billion of net market appreciation, partly offset by long-term net outflows of $2.5 billion. Mathematical equity and fundamental equity long-term net outflows amounted to $1.8 billion and $1.9 billion, respectively, while fixed income long-term net inflows totaled $1.2 billion.

Balance Sheet

As of March 31, 2012, Janus Capital had stockholders’ equity of $1.4 billion, cash and investments of $608.7 million and outstanding debt of $538.1 million. Notably, 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 implemented an anti-dilutive stock buyback plan in the reported quarter in an effort to manage its capital and liquidity position effectively. The company used $2.4 million in the quarter to repurchase 263,600 shares of its common stock at an average price of $9.05 per share.

Moreover, the Board of Directors of Janus Capital also approved a 20% hike in the company’s regular quarterly dividend to 6 cents per share from 5 cents. The dividend will be paid on May 21, 2012, to stockholders of record as of the close of business on May 7, 2012.

Our Take

With a best-in-class investment boutique, we believe Janus Capital has the capacity to grow its revenue and assets under management. Yet weakness in net flows continues to be a headwind. While the company’s fixed income segment and global operations are showing signs of improvement, the company’s equity-heavy portfolio will keep it exposed to the volatility of the equity market.

Moreover, a low interest rate environment will likely affect the money market business. Nevertheless, given its healthy balance sheet, we believe Janus Capital has the potential to perform well in the long run.

Among its peers, Federated Investors Inc. ( FII - Analyst Report ) is scheduled to report its earnings on following the market closure on April 26 while Waddell & Reed Financial Inc. ( WDR - Analyst Report ) will report prior to the market opening on April 30.

Janus Capital retains a Zacks #2 Rank, which translates into a short-term Buy recommendation. However, considering the fundamentals, we are maintaining a Neutral recommendation on the stock.