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On December 31, 2012, we reiterated our long-term Neutral recommendation on Waddell & Reed Financial Inc. (WDR - Analyst Report) based on the company’s constantly improving assets under management (AUM) and robust capital deployment activities. However, the presence of substantial intangibles on its balance sheet and downward pressure on investment advisory fees (in the mutual fund industry) remain the major causes of concern for this asset management company.

Why the Neutral Stance?

We maintain the stance since the Zacks Consensus Estimate for Waddell & Reed remained almost unchanged for 2012 over the last 60 days. In addition, over the past four quarters, Waddell & Reed has delivered an average earnings surprise of only 3.7%. This Zacks #2 Rank (Buy) stock is expected to announce its fourth quarter results on January 29, 2013.

The Zacks Consensus Estimate for the fourth quarter is 58 cents along with a revenue estimate of $307 million. The company had delivered better-than-expected third-quarter earnings (outpacing the Zacks Consensus Estimate by a nickel) based on augmented top line, partially offset by higher expenses.

Further, the company’s sustained AUM growth and history of boosting shareholders’ value through meaningful capital deployment activities along with investment in Advisory channel to boost revenue are the positives. There were continued strong investment performances behind the solid AUM growth trajectory despite unfavorable market conditions.

Also, investment in Advisors channel by delivering additional support to its advisors through training opportunities and enhanced technology tools, including compliance-related technology, are anticipated to improve the company’s revenues and AUM in the near term.

However, the presence of substantial intangibles on its balance sheet makes us apprehensive. Further, the highly equity-centric nature of AUM and the new rules adopted by Securities and Exchange Commission for improvement of mutual fund corporate governance could result in further downward pressure on investment advisory fees, thereby adversely impacting the company’s revenue and earnings.

Other stocks to consider

The other stocks in the bank sector that are performing well and are worth considering include AllianceBernstein Holding L.P. (AB - Snapshot Report) and Heartland Financial USA Inc. (HTLF - Snapshot Report). These two companies carry a Zacks #1 Rank (Strong Buy).

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