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Impressive Q1 Earnings for Franklin

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Driven by higher revenues, Franklin Resources Inc.’s (BEN - Free Report) fiscal first-quarter 2014 earnings reached 96 cents per share, surpassing the Zacks Consensus Estimate by 3 cents. Moreover, results outpaced the prior-year quarter earnings of 81 cents.

Our proven model predicted that Franklin would beat earnings as it had the right combination of two key ingredients – the Earnings ESP and Zacks Rank. It had a Zacks Rank #2 (Buy) and a positive Earnings ESP.

Better-than-expected results came on the back of higher revenues. Moreover, increased level of assets under management (AUM) and a strong capital position were the tailwinds. Yet, higher operating expenses were a dampener.

Net income was $603.8 million in the quarter compared with $516.1 million in the prior-year quarter.

Performance in Detail

Total operating revenue surged 11% year over year to $2.11 billion, due to growth in most revenue avenues. Revenue results were also above the Zacks Consensus Estimate of $2.09 billion.

Investment management fees increased 14% year over year to $1.37 billion, while sales and distribution fees jumped 5% year over year to $636.7 million. Moreover, shareholder servicing fees inched up 2% on a year-over-year basis to $76.1 million, with other net revenue declining 2% year over year to $22.9 million.

Total operating expenses increased 7% year over year to $1.3 billion. The upsurge mainly resulted from higher sales, distribution and marketing expenses, increased information systems and technology expenses and elevated compensation and benefits and general, administrative and other expenses.

As of Dec 31, 2013, total AUM was $879.1 billion, up from $781.8 billion as of Dec 31, 2012, driven by market appreciation of $77.3 billion and $24.0 billion of net new flows. Simple monthly average AUM of $865.9 billion during the quarter climbed 13% year over year.

Capital Position

As of Dec 31, 2013, cash and cash equivalents along with investments were $9.0 billion compared with $8.6 billion as of Sep 30, 2013. Moreover, total stockholders' equity was $11.1 billion versus $10.7 billion as of Sep 30, 2013.

During the reported quarter, Franklin repurchased 2.5 million shares of its common stock for a total cost of $137.1 million.

Our Viewpoint

Franklin's global footprint is an exceptionally favorable strategic point as its AUM is well diversified. The company is also poised to benefit from its strong balance sheet. However, regulatory restrictions and sluggish economic recovery could mar AUM growth and increase costs. Additionally, higher expenses remain a matter of concern.

Among other investment managers, Legg Mason Inc. (LM - Free Report) is scheduled to report December quarter end results on Jan 31, Ameriprise Financial, Inc. (AMP - Free Report) on Feb 4 and Lazard Ltd. (LAZ - Free Report) on Feb 5.

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