Though benefits from a stabilizing economy and gradually improving interest-rate scenario had positioned the investment-management industry well, investment managers might be affected by the Fed’s dovish stance, hinting at no rate hikes this year, along with lower expectations for GDP growth and inflation despite a solid labor market. Further, margin compression as well as escalating compliance and technology costs will likely hurt investment managers’ profits in the near term.
Nevertheless, most investment managers have waived off majority of their fees with the rates rising since 2016. This decline in fee waivers has aided companies’ top-line growth. Moreover, asset managers are expected to record revenue growth in the recently-concluded quarter backed by increase in assets under management (AUM).
Performance of equity markets remained favorable in first-quarter 2019 as reflected by nearly 13.1% quarterly growth of the S&P 500 Index, expected to result in a higher AUM.
Therefore, we are focusing on two investment managers — Federated Investors (FII - Free Report) and Franklin Resources (BEN - Free Report) .
Federated, with a market cap of $3 billion, is a publicly-owned investment manager providing services to its clients and invests in public equity and fixed income markets globally. Franklin operates as a provider of various financial products and services to individual and institutional clients in the United States and globally, and has a market cap of $17.3 billion.
Federated currently sports a Zacks Rank #1 (Strong Buy), with a Value Score of B, while Franklin carries a Zacks Rank #2 (Buy), with a Value Score of C. Our research shows that stocks with a Value Score of A or B, when combined with a Zacks Rank #1 or 2, offer the best upside potential.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Though both asset managers have similar business trends, deeper research into the financials will help decide which investment option is better.
Both asset managers have outperformed the industry (down 4%) in the past six months. While shares of Federated have gained 20.7%, Franklin’s stock climbed 11.9%. So, Federated performed better than Franklin.
Both companies have been deploying capital in terms of dividend payments to enhance shareholder value. Federated has a current dividend yield of 3.59%, while Franklin has a dividend yield of 3.04%.
As compared with the industry’s average of 3.02%, shareholders of Federated gain more.
Federated has debt-to-equity ratio of 0.16 as compared with the industry average of 0.24. But Franklin, with ratio of 0.07, has an edge over Federated.
Return on Equity (ROE)
ROE is a measure of a company’s efficiency in utilizing shareholders’ funds. ROE for the trailing 12-months for Federated and Franklin is 29.33% and 15.01%, respectively. While both stocks scored above the industry’s level of 13.85%, Federated reinvests its earnings more efficiently.
Earnings Estimate Revisions & Growth Projections
The Zacks Consensus Estimate for 2019 earnings of Federated increased about 4.3%, over the last 60 days. On the other hand, the same for Franklin moved 1.7% north for the current fiscal year, during the same time frame.
Moreover, Federated’s 2019 earnings are projected to jump 11.9% year over year. For Franklin, the Zacks Consensus Estimate is pinned at $2.37 for fiscal 2019, reflecting a year-over-year decrease of 25.7%.
Hence, Federated reflects better earnings growth prospects.
Sales for Franklin for the ongoing fiscal year are projected to be down 11.1% year over year to $5.6 billion. For Federated, the Zacks Consensus Estimate is pegged at $1.3 billion for 2019, reflecting year-over-year growth of 10.9%.
Therefore, Federated has an edge here as well.
Our comparative analysis shows that Federated is better positioned than Franklin when considering price performance, earnings and sales growth expectations, reinvesting potential, dividend yield and valuation. Franklin wins on leverage ratio.
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