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Federated Investors Inc. (FII - Analyst Report) reported its first-quarter 2012 earnings per share of 41 cents, beating the Zacks Consensus Estimate by 2 cents. Though, this compared favorably with the prior-quarter earnings of 36 cents, it was lower than the prior-year quarter earnings of 43 cents.

Net income for the quarter was $42.3 million, up 15% from $36.9 million in the prior quarter and 27% from $33.2 million in the prior-year quarter. Net income for the first-quarter 2011 included certain nonrecurring legal expenses.

The sequential improvement reflects an enhanced top line and lower voluntary money market fund fee waivers, partly offset by higher operating expenses. Moreover, there were increases in fixed income, equity and money market assets as well as assets under management (AUM) in the quarter under review.

Performance in Detail

Total revenue climbed up 6% sequentially to $230.3 million, driven by an increase in total average managed assets and decrease in voluntary money market fund fee waivers.

However, revenue declined 4% year over year owing to an increase in voluntary money market fund fee waivers, as well as changes in the composition of average equity assets, partly mitigated by increases in revenue from higher average money market and fixed-income assets. Revenue for the quarter was below the Zacks Consensus Estimate of $238.0 million.

During the reported quarter, Federated derived 53% of its revenue from equity and fixed-income assets (32% from equity assets and 21% from fixed-income assets), 46% from money market assets and 1% from other products and services.

Total operating expenses climbed 3% sequentially to $159.9 million in the quarter. The increase was primarily driven by higher compensation, distribution and professional service fees partly offset by lower advertising and promotional expenses along with lower travel-related expenses.

However, expenses declined 12% year over year, as a result of lower distribution, compensation and professional service fees partially offset by rise in systems and communication expenses as well as higher travel related expenses.

Assets Position

As of March 31, 2012, total AUM was $363.6 billion, down 2% from $369.7 billion as of December 31, 2011 and up 2% from $354.9 billion as of March 31, 2011. Average managed assets grew 3% from $358.3 billion in the prior quarter and 4% from $356.3 billion in the prior-year quarter to $370.1 billion.

At the quarter end, fixed-income assets increased 3% sequentially and 11% year over year to $46.2 billion. Equity assets came in at $34.1 billion, rising 10% sequentially and 8% on a year-over-year basis.

Further, money market assets in both funds and separate accounts fell 4% sequentially but increased1% year over year to $274.7 billion. Money market mutual fund assets were $245.2 billion in the quarter, dipping 4% from $255.9 billion in the previous quarter and rising 3% from $239.0 billion in the year-ago period.

As of March 31, 2012, cash and other investments were $310.6 million, declining 3.6% from $322.3 million as of December 31, 2011.

Share Repurchase

In the reported quarter, Federated repurchased 50,000 shares of its class B common stock for $1.1 million.

Dividend Update

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

Competitive Landscape

Invesco Ltd. (IVZ - Analyst Report), one of Federated’s closest peers, reported its first-quarter earnings in line with the Zacks Consensus Estimate. The performance was driven by an improvement in net revenue partly offset by higher operating expenses. Moreover, the company’s assets under management and balance sheet position remained healthy during the quarter.

However, the earnings of another competitor T. Rowe Price Group, Inc. (TROW - Analyst Report) marginally missed the Zacks Consensus Estimate as enhanced top line was more-than-offset by higher non-interest expenses. However, the company’s total assets under management increased in the reported quarter.

Conclusion

We expect the persistent regulatory pressures, slow global economic growth and a low-interest rate environment to keep the company’s earnings under pressure in the upcoming quarters. However, Federated has the potential for significant growth in the long run, given its fairly liquid balance sheet and a diversified asset as well as product mix.

Moreover, investors’ increased demand for the company’s wide range of income-oriented products will help it increase profitability.

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

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