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Federated Hermes (FHI) Strategic Buyouts Aid, Cost Woes Stay

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Federated Hermes (FHI - Free Report) has been benefiting from strategic acquisitions and operational expansion efforts. These bode well for revenue growth and improvement in assets under management (AUM) balance. However, a rise in expenses and a strict regulatory environment remain near-term concerns.

Federated Hermes’ acquisitions of money-market assets bode well, particularly under the prevailing pressure on money-market funds amid stringent regulations. Increased money-market AUM will furnish the company with various new fund offerings that would benefit its clients.

In the last few years, FHI has expanded its operations in the United Kingdom and Chile, while continuing to seek alliances to expand in Europe, the Asia-Pacific region and the United States. Last year, it completed the buyout of certain investment management-related assets of Horizon Advisers and acquired the remaining 29.5% interest in London-based Hermes Fund Managers Limited from BT Pension Scheme. Its average AUM witnessed a four-year (ended 2021) compound annual growth rate (CAGR) of 15.1%. Driven by the company’s inorganic growth efforts, this momentum is expected to continue improving in the upcoming period as well.

Also, Federated Hermes has a robust balance sheet. As of 2021 end, the company’s long-term debt was $223.4 million, and cash and other investments totaled $426.7 million. Given a decent liquidity position and manageable debt levels, the company has a lesser likelihood of defaulting interest and debt repayments if the economic situation worsens.

However, Federated Hermes’ operating expenses have been exhibiting an uptrend for the past few years with a four-year CAGR (2018-2021) of 5.1%. Compliance-related fees are expected to escalate in the near term due to the strictly-regulated nature of the investment management business. Also, the company expects new hires to increase compensation expenses in the first quarter of 2022. Distribution expense and travel are also expected to increase while continued investment in technology will increase system and communication costs.

Further, Federated has been waiving fees in certain money market funds to enable certain funds to maintain positive or zero net yields. Waived fees increased modestly in 2021, 2020 and 2018 based on the current assets and yields, while the same were stable in 2019. Thus, the ongoing acceleration in waived fees might negatively impact Federated’s top-line performance in the near term.

Currently, Federated Hermes carries a Zacks Rank #3 (Hold). Over the past year, shares of the company have gained 9.2% against a 13.2% decline recorded by the industry.

Finance Stocks to Consider

Some better-ranked stocks in the banking space are Bank of Hawaii (BOH - Free Report) , First Business Financial Services (FBIZ - Free Report) , and PCB Bancorp (PCB - Free Report) . At present, Bank of Hawaii sports a Zacks Rank #1 (Strong Buy), while FBIZ and PCB carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Over the past six months, shares of PCB have jumped 15.9%, whereas FBIZ and BOH stocks have rallied 14.3 and 5.2%, respectively.

Over the past 30 days, the Zacks Consensus Estimate for First Business’ current-year earnings has been revised marginally upward, while the same for PCB Bancorp and Bank of Hawaii has stayed constant.

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