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Janus Capital Group Inc. (JNS - Analyst Report) reported first-quarter 2013 earnings per share of 15 cents, lagging the Zacks Consensus Estimate by a penny. This also compared unfavorably with the prior-year quarter earnings of 17 cents.

Lower-than-expected results were due to declining revenues and increased operating expenses. Yet, increased asset under management (AUM) was a positive.

Net income attributable to common shareholders stood at $28.0 million compared with $22.6 million in the prior quarter.

Performance in Detail

Total revenue dropped 1% sequentially to $214.2 million, primarily due to lower private account performance fees, offset by higher investment management fee revenue.  However, revenues were marginally higher than the Zacks Consensus Estimate of $214.0 million.

Total operating expenses increased 1% sequentially to $159.5 million. The rise was on the back of higher compensation expenses, partially offset by a decrease in discretionary expenses.

Asset Position

As of Mar 31, 2013, Janus Capital reported AUM of $163.8 billion, up from $156.8 billion as of Dec 31, 2012. Further, average AUM increased on a sequential basis to $161.8 billion from $155.6 billion.

The increase in company-wide assets during the first quarter 2013 primarily reflects net market appreciation of $11.0 billion offset by long-term net outflows of $3.9 billion. Fundamental equity and mathematical equity long-term net outflows totaled $1.8 billion and $2.4 billion, respectively, while fixed income long-term net inflows totaled $0.3 billion.

Balance Sheet

As of Mar 31, 2013, Janus Capital had stockholders’ equity of $1.5 billion, cash and investments of $719.7 million and outstanding debt of $547.6 million compared with stockholders’ equity of $1.4 billion, cash and investments of $725.6 million and outstanding debt of $545.1 million in the prior quarter.

Cash flow from operations during the reported quarter was negative $13.3 million compared with positive $67.4 million in the prior quarter.

Capital Deployment Activity

During the first quarter of 2013, Janus Capital repurchased 376,349 shares of its common stock at an average price of $9.44 per share.

Our Viewpoint

Janus Capital has the best-in-class investment boutique with the potential for AUM and revenue along with competitive leverage growth. However, weakness in flows remains a matter of concern.

Though fixed income segment and global operations are showing signs of improvement, the company’s equity-heavy portfolio make it vulnerable to the volatilities of the equity market. Further, 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.

Shares of Janus Capital currently carry a Zacks Rank #2 (Buy). Other stocks in the same sector performing well include Virtus Investment Partners, Inc. (VRTS - Snapshot Report), Affiliated Managers Group Inc. (AMG - Analyst Report) and Ameriprise Financial, Inc. (AMP - Analyst Report). While Virtus Investment carries a Zacks Rank #1 (Strong Buy), the other two carry a Zacks Rank #2.

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