Invesco Misses on Both Lines

Invesco Ltd.’s (IVZ - Analyst Report) fourth-quarter adjusted earnings came in at 45 cents per share, marginally missing the Zacks Consensus Estimate of 47 cents. Yet, this compares favorably with adjusted earnings of 42 cents recorded in the previous quarter.

Lower-than-expected quarterly results came on the back of a rise in operating costs, partly offset by higher net revenue. Further, improved assets under management (AUM) and stable balance sheet position were the tailwinds.

On a GAAP basis, net income in the fourth quarter stood at $158.7 million or 35 cents per share, down from $170.6 million or 38 cents in the prior quarter. For 2012, it was $677.1 million or $1.49 per share, down from $729.7 million or $1.57 per share in 2011.

For 2012, adjusted earnings per share were $1.71, slightly below the Zacks Consensus Estimate of $1.74. Yet, this was up 1.8% from $1.68 in 2011.

Behind the Headlines

Adjusted net revenue grew 5.6% sequentially to $775.9 million in the reported quarter. Increases in investment management fees and performance fee revenues were the primary reasons behind the rise. However, net revenue was nowhere near the Zacks Consensus Estimate of $1.11 billion.

For 2012, adjusted net revenue was recorded at $3.0 billion, up 2.1% year over year. Yet, it was substantially below the Zacks Consensus Estimate of $4.25 billion.

Adjusted operating expenses hiked 3.1% from the prior quarter to $499.4 million. The increase was primarily attributable to higher employee compensation expenses and general and administrative expenses, partially offset by lower marketing expenses.

Adjusted operating margin for the quarter was 35.6%, rising from 34.1% in the prior quarter.

Assets Under Management

As of Dec 31, 2012, AUM inched up 0.7% sequentially to $687.7 billion, reflecting net market gains, partially offset by unfavorable foreign exchange rate changes. Average AUM for the reported quarter was $680.2 billion, up 1.8% from $667.9 billion in the prior quarter.

Long-term net inflows during the quarter were $0.9 billion compared with $9.4 billion in the preceding quarter.

Balance Sheet

As of Dec 31, 2012, cash and cash equivalents were $835.5 million compared with $727.4 million as of Dec 31, 2011. Total debt was $1,186.0 million as of Dec 31, 2012, against $1,284.7 million as of Dec 31, 2011.

Additionally, credit facility balance reached $586.5 million as of Dec 31, 2012, compared with $754.5 million as of Sep 30, 2012.

Share Repurchase Update

During the reported quarter, Invesco repurchased $75 million worth of shares, representing 3.0 million shares. For 2012, the company repurchased shares worth $265.0 million.

Dividend Update

Concurrent with the earnings release, the company declared third-quarter dividend of 17.25 cents per share. The dividend will be paid on Mar 8 to shareholders of record as of Feb 21.

Peer Performances

Fourth-quarter earnings of BlackRock Inc. (BLK - Analyst Report) and Ameriprise Financial Inc. (AMP - Analyst Report) substantially exceeded the Zacks Consensus Estimate, while SEI Investments Co. (SEIC - Analyst Report) reported in line. For all these 3 companies, the year-over-year improvement was primarily attributable to increased top line, partly offset by higher operating expenses.

Our Viewpoint

Invesco’s long-term investment performance was boosted by an uptrend in the global equity markets, which is envisioned to uplift the company’s operating results. Moreover, the operating leverage is expected to improve significantly over the long term due to Invesco’s cost-control initiatives.

Invesco is well positioned to benefit from improved global investment flows owing to its broad diversification. Also, meaningful capital deployment activities will enhance shareholders confidence in the stock. However, volatile U.S. dollar and increasing competition remain the major areas of concern.

Invesco currently retains a Zacks Rank #3 (Hold).