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On Apr 2, 2013, we reiterated our Neutral recommendation on Federated Investors, Inc. (FII - Analyst Report) based on its improving top line. However, escalating operating expenses was the downside.

Why Neutral?

Federated’s fourth-quarter earnings of 48 cents per share surpassed the Zacks Consensus Estimate as well as the prior-quarter earnings. Results were aided by top-line growth as a result of decline in voluntary fee waivers. Moreover, a rise in total assets under management, primarily driven by escalated fixed income assets, was a positive in the quarter. Yet, results were partially affected by elevated operating expenses.

Over the last 60 days, the Zacks Consensus Estimate for 2013 remained stable whereas for 2014 it declined by only 2%. As a result, Federated carries a Zacks Rank #3 (Hold).

Moreover, the company’s leading position as a fund manager in the U.S and a diverse business mix are long-term growth drivers. Further, a strong liquidity position and the ability to make opportunistic acquisitions are positives for the stock. Extensive capital deployment activities also continue to reinforce investors’ confidence in the stock.

However, the volatile regulatory landscape is expected to be a headwind in the near future. Further, we remain concerned about the regulations governing the money market funds, which might significantly impact Federated’s money market fund business. In addition, the decline in fee waivers is expected to continue till mid-2015, which may temper the company’s profitability in the near to mid term.

Other Banks Worth Considering

Other banks that are performing better than Federated include Meta Financial Group, Inc. (CASH - Snapshot Report), Flagstar Bancorp Inc. (FBC - Snapshot Report) and First Defiance Financial Corp. (FDEF - Snapshot Report). All these stocks carry a Zacks Rank #1 (Strong Buy).

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