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Invesco Lags on Higher Expenses

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Invesco Ltd.’s (IVZ - Free Report) third quarter adjusted earnings came in at 42 cents per share, marginally missing the Zacks Consensus Estimate of 44 cents. Yet, this compares favorably with adjusted earnings of 41 cents recorded in the previous quarter.

Invesco’s lower-than-expected results were attributable to a rise in operating costs, partly offset by higher net revenue. Further, improved assets under management (AUM) and stable balance sheet position were the tailwinds.

On a GAAP basis, net income was $170.6 million or 38 cents per share, up from $153.9 million or 34 cents in the prior quarter.

Behind the Headlines

Adjusted net revenue surged 3.2% sequentially to $734.7 million. Increases in investment management fees as well as service and distribution fees were partially offset by fall in performance fees and other revenue. However, net revenue was nowhere near the Zacks Consensus Estimate of $1.1 billion.

Adjusted operating expenses escalated 4.6% from the prior quarter to $484.3 million. The increase was primarily attributable to higher employee compensation expenses, partly mitigated by lower marketing expenses as well as decline in general and administrative expenses.

Adjusted operating margin for the quarter was 34.1%, down from 35.0% in the prior quarter.

Assets under Management

As of September 30, 2012, AUM rose 5.6% sequentially to $683.0 billion, reflecting net market gains and favorable foreign exchange rate changes. Average AUM for the reported quarter was $667.9 billion, up 2.6% from $651.2 billion in the prior quarter.

Long-term net inflows during the quarter were $9.4 billion compared with long-term net outflows of $4.9 billion in the preceding quarter.

Balance Sheet

As of September 30, 2012, cash and cash equivalents were $880.1 million compared with $727.4 million as of December 31, 2011. Total debt was $1,285.1 million as of September 30, 2012, against $1,284.7 million as of December 31, 2011.

Additionally, credit facility balance was $754.5 million as of September 30, 2012, as against $811.0 million as of June 30, 2012.

Share Repurchase Update

During the reported quarter, Invesco repurchased $40 million worth of shares, representing 1.8 million shares at an average price of $22.16 per share. Hence, for the first nine months of 2012, the company repurchased shares worth $190 million.

Dividend Update

Concurrent with the earnings release, the company declared third-quarter dividend of 17.25 cents per share. The dividend will be paid on December 7, to shareholders of record as of November 19.

Peer Performance

T. Rowe Price Group Inc.’s (TROW - Free Report) third quarter earnings exceeded the Zacks Consensus Estimate. Higher-than-expected top-line growth and increased assets under management were the positives for the quarter. However, elevated operating expenses acted as a dampener.

Our Viewpoint

Invesco’s long-term investment performance was boosted by an uptrend in the global equity markets, which likewise is envisioned to uplift the company’s operating results.  Moreover, the operating leverage is expected to improve significantly over the long term due to Invesco’s cost-control initiatives.

Invesco is well-positioned to benefit from improved global investment flows, resulting from its broad diversification. However, volatile U.S. dollar and increasing competition remain the major areas of concern.

Invesco currently retains a Zacks #2 Rank, which translates into a short-term Buy rating. However, considering the fundamentals, we also maintain a ‘Neutral’ recommendation on the stock.

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