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Franklin Beats on Higher Revenue

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Franklin Resources Inc.’s (BEN - Free Report) fiscal fourth quarter 2012 earnings of $2.31 per share marginally beat the Zacks Consensus Estimate. Moreover, results outpaced earnings of $2.12 in the prior quarter.

Better-than-expected results came on the back of higher revenues. Moreover, increased level of assets under management (AUM) was a tailwind for the quarter. Yet, higher operating expenses were a dampener.

For fiscal 2012, earnings per share were $8.95 versus $8.62 in the prior year. However, earnings lagged the Zacks Consensus Estimate by 2 cents per share.

Net income was $492.1 million in the quarter compared with $455.3 million in the prior quarter. For fiscal 2012, net income was $1.93 billion compared with $1.92 billion in the prior year.

Performance in Detail

Total operating revenue surged 2% sequentially to $1.82 billion, primarily due to higher investment management fees and improved sales and distribution fees, partially offset by lower shareholder servicing fees and reduced other net revenue. Revenue results were in line with the Zacks Consensus Estimate.

For fiscal 2012, total operating revenue declined 1% year over year to $7.1 billion. Moreover, revenues were in line with the Zacks Consensus Estimate.

Investment management fees increased 3% sequentially to $1.14 billion, while sales and distribution fees inched up 2% sequentially to $580 million. However, shareholder servicing fees dipped 5% sequentially, with other net revenue declining 10% sequentially to $20.4 million.

Total operating expenses increased 5% sequentially to $1.19 billion. The upsurge mainly resulted from higher general, administrative and other expenses, elevated information systems and technology expenses and high occupancy expenses.

As of September 30, 2012, total AUM was $749.9 billion, up from $707.1 billion as of June 30, 2012, driven by market appreciation of $40.8 billion and net new flows of $2.9 billion.

Simple monthly average AUM of $726.7 billion during the quarter climbed 2% sequentially. Net new flows were $2.9 billion versus $4.8 billion in the prior quarter.

Balance Sheet Position

As of September 30, 2012, cash and cash equivalents along with investments were $10.7 billion compared with $9.4 billion as of September 30, 2011. Moreover, total stockholders' equity was $9.8 billion versus $9.1 billion as of September 30, 2011.

During the reported quarter, Franklin repurchased 0.8 million shares of its common stock for a total cost of $98.6 million. The company also issued senior notes with a total face value of $600 million.

Developments during the Quarter

In September 2012, Franklin, operating as Franklin Templeton Investments, announced the acquisition of the controlling stake in K2 Advisors Holdings LLC (K2), an independent fund of hedge funds solutions provider. Financial terms of the deal were undisclosed.

The purchase of K2 will assist Franklin Templeton in improving and expanding its alternative investments and multi-asset solutions platforms. Such strategic initiatives would help Franklin in providing world-class investment solutions to its clients and auger well for worldwide expansion.

Our Viewpoint

Franklin's global footprint is an exceptionally favorable strategic point as its AUM is well diversified. The company is also poised to benefit from its strong balance sheet. However, regulatory restrictions and sluggish economic recovery could mar the AUM growth and increase costs. Additionally, higher expenses remain a matter of concern.

Shares of Franklin currently retain a Zacks #1 Rank, which translates into a short-term Strong Buy rating.

Amongst Franklin’s peers, Invesco Ltd. (IVZ - Free Report) is expected to release its third-quarter 2012 results on November 1, 2012.

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