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Neutral on Waddell & Reed

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On Jun 11, 2013, we reiterated our Neutral recommendation on Waddell & Reed Financial Inc. (WDR - Free Report) based on its better-than-expected results, increasing assets under management (AUM) and meaningful capital deployment activities. However, the presence of substantial intangibles and pressure on investment advisory fees remain causes of concern.

Why Neutral?

Waddell & Reed’s first-quarter earnings from continuing operations were slightly above the Zacks Consensus Estimate. Results benefited from an augmented top line, partially offset by higher expenses. Further, gross sales increased across all revenue channels, excepting the Institutional channel.

Following first-quarter results, 6 out of 10 estimates for 2013 have moved up, helping the Zacks Consensus Estimate rise 2.3% to $2.70 per share over the past 60 days. Similarly, for 2014, 7 out of 10 estimates increased 3.0% to $3.09 over the same time period. Hence, the company currently carries a Zacks Rank #3 (Hold).

Waddell & Reed’s AUM trajectory has displayed significant growth, reflecting a 12-year (2000-2012) CAGR of 12.68%. Moreover, the company has a history of enhancing shareholder value through dividend payments and share repurchases. In Nov 2012, it increased its quarterly dividend by 12% to 28 cents per share and has maintained the same since then. Waddell & Reed repurchased approximately 81,701 shares worth about $3.4 million in the first quarter of 2013.

However, the presence of substantial intangibles on Waddell & Reed’s balance sheet makes us apprehensive. Further, the highly equity-centric nature of AUM and the new rules adopted by the Securities and Exchange Commission for improvement of mutual fund corporate governance will likely put additional pressure on investment advisory fees, thereby adversely impacting the company’s financial performance.

Other Stocks to Consider

Better performing stocks in the same sector include Virtus Investment Partners, Inc. (VRTS - Free Report) , Noah Holdings Limited (NOAH - Free Report) and Artisan Partners Asset Management Inc. (APAM - Free Report) . All the three stocks carry a Zacks Rank #1 (Strong Buy).

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