A month has gone by since the last earnings report for Waddell & Reed Financial, Inc. (WDR - Free Report) . Shares have lost about 12% in that time frame, underperforming the market.
Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Waddell & Reed's Q2 Earnings & Revenues Beat Estimates
Waddell & Reed’s second-quarter 2017 adjusted earnings of 39 cents per share surpassed the Zacks Consensus Estimate of 37 cents. However, it compared unfavorably with the year-ago quarter’s adjusted earnings of 58 cents.
Results benefitted from a decline in operating expenses. However, lower revenues were a headwind. Also, despite higher gross sales, as well as a fall in net outflows during the quarter, assets under management continued to decline. Nevertheless, a solid balance sheet position was a positive for the company.
After considering some non-recurring items, net income attributable to Waddell & Reed totaled $23.3 million or 28 cents per share compared with nearly $33.7 million or 41 cents per share in the prior-year quarter.
Revenues, Expenses & AUM Decline
Operating revenues for the quarter decreased 10.2% year over year to $286.7 million, reflecting a decline in all components. However, it marginally surpassed the Zacks Consensus Estimate of $285.7 million.
Gross sales increased 17.4% year over year to $3.30 billion. Redemptions declined 54.2% year over year to $5.76 billion. Also, net outflows were $2.46 billion at the quarter end, down from $9.76 billion at the end of the prior-year quarter.
Operating expenses decreased 11.2% year over year to $235.8 million. The decline was primarily due to a fall in underwriting and distribution expenses, and compensation and related costs.
Operating margin was 17.8%, increasing from 16.8% a year ago.
As of Jun 30, 2017, AUM totalled $80.43 billion, reflecting a decline of nearly 7% from the Jun 30, 2016 level.
As of Jun 30, 2017, the company’s cash and cash equivalents as well as investment securities totalled $929.8 million. Long-term debt was $94.7 million and stockholders’ equity was $844.2 million.
Performance of the Distribution Channels
At the Retail Broker-Dealer channel, gross sales increased 4.4% year over year to $1.14 billion. However, net outflows totalled $911 million, increasing from the year-ago quarter’s figure of $398 million.
At the Retail Unaffiliated Distribution channel, gross sales increased 36.3% year over year to $2.08 billion. Also, net outflows were $571 million, declining 85.3% year over year.
Gross sales at the Institutional channel were $78 million, declining 58.9% from the year-ago quarter. The segment witnessed net outflows of $973 million, declining 82.2% from the prior-year quarter.
Waddell & Reed bought back 237,472 shares for approximately $4 million during the quarter.
The company expects that once the nine Advisor Funds are merged into the Ivy Funds, annual management fee revenues for the merged funds will decline $0.4 million in 2017. Also, provided the company receives regulatory approval for the merger of all the remaining funds, revenues will decline nearly $10-$11 million in 2018.
The company plans to freeze its defined benefit pension plan in September 2017 and for this it will provide eligible employees with a one-time transition contribution to their 401(k) accounts. This change is expected to result in one-time increase in compensation expenses of $3 million in the second half of 2017. Nevertheless, as a result of freezing the pension plan, the company projects to generate annual savings of $12 million in 2018.
For 2017, management targets to maintain fixed costs at second half 2016 levels.
The company expects its efforts toward aligning cost structure to the new operating model by continuously monitoring home office and field support staff and G&A costs will lead to incremental pre-tax income of $30-$40 million in the next 18 to 24 months.
Further, management expects on-going expenses for Project E to be recorded in indirect distribution costs of around $7 million during 2017. These incremental expenses relate to costs of the fund screening and model portfolios.
How Have Estimates Been Moving Since Then?
Analysts were quiet during the last month as none of them issued any earnings estimate revisions.
Waddell & Reed Financial, Inc. Price and Consensus
At this time, Waddell & Reed Financial's stock has a poor Growth Score of F, though its Momentum is a bit better with a D. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
The company's stock is suitable solely for value investors based on our style scores.
Notably, the stock has a Zacks Rank #3 (Hold). We expect in-line returns from the stock in the next few months.