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Federated Investors (FII) Up 15.3% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Federated Investors (FII - Free Report) . Shares have added about 15.3% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Federated Investors due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Federated Q4 Earnings Top Estimates on Higher Revenues

Federated delivered a positive earnings surprise of 1.7% in fourth-quarter 2018. Earnings per share (EPS) of 61 cents surpassed the Zacks Consensus Estimate of 60 cents. However, the figure compares unfavorably with the prior-year quarter earnings of $1.31.

Higher revenues and improved AUM were the positives. However, elevated expenses were an undermining factor.

Net income for the reported quarter came in at $61.5 million compared with $131.8 million in the year-ago quarter.

For 2018, EPS of $2.18 surpassed the Zacks Consensus Estimate of $2.15. However, it declined from the year-ago figure of $2.87. Net income available to common stockholders (GAAP basis) was $220.3 million, down 24.4%.

Revenues Rise, Costs Escalate

Total revenues in the fourth quarter climbed 10% year over year to $307.2 million. Yet, the figure lagged the Zacks Consensus Estimate of $309.7 million.

Total revenues for 2018 were $1.14 billion, up 3% from the year-ago quarter. Further, it came in line with the Zacks Consensus Estimate.

The year-over-year upswing in revenues mainly stemmed from the consolidation of Hermes' revenues, partly countered by the adoption of new revenue-recognition accounting principle. Further, higher voluntary fee waivers for certain money market funds for competitive purposes and decline in revenues from lower average equity assets unfavorably impacted revenues.

Also, net investment advisory fees jumped 15% year over year to around $214 million. In addition, administrative service fees were up 6% to $52 million. However, net service fees (other) marked a 4% decline, amounting to $41.2 million.

During the quarter under review, Federated derived 36% of its revenues from money market assets, 63% from equity and fixed-income assets, and remaining 1% from sources other than managed assets.

Furthermore, due to net investment loss and higher debt expenses, the company recorded non-operating expenses of $6.2 million in the quarter, down 362% year over year.

Total operating expenses escalated 17% year over year to $219.3 million. The rise was primarily due to the consolidation of Hermes' expenses, partly offset decline in expenses on account of adoption of the new revenue-recognition accounting standard.

Steady Asset Position

As of Dec 31, 2018, total AUM was approximately $460 billion, up 16% year over year. Average managed assets were $443.7 billion, up 16%.

Federated witnessed equity assets of $72.5 billion, up 15% year over year. Also, money market mutual fund assets came in at $208.5 billion, up 12%.

Further, fixed-income assets declined 1.7% year over year to $63.1 billion. Additionally, money-market assets increased 13.8% to $301.8 billion.

As of Dec 31, 2018, cash and other investments were $190.5 million and total long-term debt totaled $135 million compared with $369.5 million and $170 million, respectively, as of Dec 31, 2017.

Capital Deployment Update

During the fourth quarter, the company repurchased 95,298 shares of Federated class B common stock for $2.2 million. With this, it repurchased a total of 1,205,790 shares for $29.1 million in 2018.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

Currently, Federated Investors has a poor Growth Score of F, however its Momentum Score is doing a lot better with an A. However, the stock was allocated a grade of C on the value side, putting it in the middle 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.

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. Notably, Federated Investors has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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