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Fortress Investment Up on Earnings Beat & Special Dividend

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Shares of Fortress Investment Group LLC gained 1.5% after it reported second-quarter 2014 pre-tax distributable earnings of 39 cents per share, up 30% year over year. Moreover, results outpaced the Zacks Consensus Estimate of 34 cents. The declaration of a special dividend along with the earnings release also helped boost investors’ confidence.

In the reported quarter, Fortress Investment sold its entire remaining stake in GAGFAH and Brookdale which led to realized investment gains of $91 million. The company acknowledged this short sales gain in the pre-tax distributable earnings.

Results were primarily aided by solid growth in revenues. Moreover, a robust balance sheet position and enhanced management fee paying assets under management (AUM) were among the positives. However, elevated expenses continued to be an unfavorable factor.

On a GAAP basis, net income came in at $69 million, up significantly from the prior-year quarter net loss of $2 million.


Business Highlights

Total revenue surged 91% year over year to $427 million. The increase was mainly attributable to the Media Business on account of the consolidation of New Media and rise in incentive income from affiliates. Also, it substantially surpassed the Zacks Consensus Estimate of $227 million.

Other income summed to $27 million, up 4% from the prior-year quarter. The rise was primarily due to gains in the quarter compared to losses incurred in the prior-year quarter. However, lower earnings from equity method investees partially offset the increase.

Total expenses climbed 52% year over year to $379 million. This upswing was primarily driven by allied expenses incurred in Media Business for the consolidation of New Media in Feb 2014. However, this was partly mitigated by lower compensation and benefits expenses.

As of Jun 30, 2014, management fee paying AUM grew 17% year over year to $63.8 billion. Notably, the Logan Circle division witnessed net client inflows of $1.7 billion.

As of Jun 30, 2014, total uncalled capital totaled $7.4 billion out of which approximately $5.7 billion is available for common investment purposes.

Balance Sheet

As of Jun 30, 2014, cash and cash equivalents were $242.6 million, compared with $364.6 million as of Dec 31, 2013. Debt obligation stood at $75 million in the quarter. Notably, there was no debt obligation outstanding as of Dec 31, 2013.

Special Dividend

The company announced a cash dividend of 26 cents per share to be paid on Aug 15 to shareholders of record as of Aug 12. The amount includes a regular quarterly cash dividend of 8 cents per share and a special cash dividend of 18 cents per share.

Our Viewpoint

Fortress Investment’s steady organic growth keeps us optimistic. However, the company’s failure to control its expenses and the persistent macroeconomic headwinds across the industry keep us apprehensive.

Currently, Fortress Investment carries a Zacks Rank #3 (Hold)

Other Investment Management Firms

Among other asset managers, Affiliated Managers Group Inc. (AMG - Free Report) , BlackRock, Inc. (BLK - Free Report) and Ameriprise Financial, Inc. (AMP - Free Report) reported solid second-quarter 2014 earnings surpassing the Zacks Consensus Estimate. Better-than-expected results were driven by improved top-line growth.

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