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Federated (FII) Falls on Rising Expenses: Should You Sell?

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On Jun 20, we issued an updated research report on New York based investment management firm Federated Investors, Inc. (FII - Free Report) . Shares of this asset manager have recorded one-year negative return of 10.2%.

Over the past few quarters, Federated’s non-interest expenses have been exhibiting an uptrend. Notably, expenses rose 4% year over year in 2015, with the uptrend continuing in to first-quarter 2016. Moreover, compensation expenses that constitute over 44% of the company’s total cost base are predicted to scale higher in the coming quarters. The management expects compensation expenses to increase to $76 million in second-quarter 2016.

Though Federated witnessed a year-over-year fall in voluntary fee waivers during 2015, fee waivers will likely result in a $6 million negative pre-tax impact for second-quarter 2016. However, the company estimates a 25-basis point (bps) increase in interest rates during 2016 to lessen the impact of minimum yield waivers to $2 million per quarter; and a 50-bps rise is expected to entirely eliminate any negative impact from such waivers.

Yet any potential waiver recovery is expected to be partly offset by adverse impact of an anticipated change in one customer relationship, which is expected to reduce pre-tax impact by $6 million per quarter in the latter half of 2016.

Further, we remain cautious due to the current economic uncertainty across the industry. These include volatile equity markets, the ongoing fee waiving trend in money market funds to maintain positive or zero net yields and the prevailing stringent regulatory landscape.

Analysts have reflected the bearish stance as well. The Zacks Consensus Estimate over the past 60 days has declined 3.1% to $1.89 for 2016, while inched down 5.5% to $2.08 per share for 2017. Hence, Federated currently carries a Zacks Rank #5 (Strong Sell).

Stocks That Warrant a Look in the Sector

Some better-ranked stocks in investment management space worth considering include Eagle Point Credit Company Inc. (ECC - Free Report) , OM Asset Management plc and Manning & Napier, Inc. (MN - Free Report) . All three stocks carry a Zacks Rank #2 (Buy).

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