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Federated Skids On Fee Waiver

By Zacks Investment Research on | More Posts By | Zacks.com


Federated Investors Inc. (NYSE:FII) reported second quarter operating earnings per share of 46 cents, which surpassed the Zacks Consensus Estimate by 6 cents, but missed the year-ago earnings of 52 cents. The reported earnings outpaced earnings of 38 cents reported in the prior quarter.

GAAP net income decreased 11% year over year but increased 13% from the prior quarter to $47.7 million. During the reported quarter, Federated recorded a non-cash impairment charge of $7.0 million, or 4 cents per diluted share after tax, which relates to intangible and fixed assets associated with a prior-year acquisition.

Results reflected an increase in fixed income equity funds and fixed income assets, decrease in operating expenses and a decline in the amortization of deferred sales commissions. This was offset by an increase in voluntary fee waivers, reduced top-line growth and lesser assets under management (AUM).

Behind the Headlines

Total revenue decreased 25% year over year and 1% from the prior quarter to $231.5 million and also missed the Zacks Consensus Estimate of $238.0 million. The decrease was primarily attributable to a $41.3 million increase in voluntary fee waivers related to certain money market funds in order to maintain positive or zero net yields. Alongside, revenue declined due to lower average money-market managed assets that were partially offset by the impact of increased average fixed-income and equity managed assets.

During the reported quarter, Federated derived 50% of its revenue from money market assets, 49% from fluctuating assets (31% from equity assets and 18% from fixed-income assets) and 1% from other products and services.

Total operating expenses decreased 33% year over year and 8% from the prior quarter to $147.6 million, primarily reflecting lower general, administrative and distribution expenses due to the aforementioned fee-waiver related reductions and lower average money market managed assets. Further, operating expenses were reduced by $25.0 million, or 15 cents per diluted share, after tax, taking into consideration the insurance proceeds during the reported quarter.

Assets Position

As of June 30, 2010, total AUM was $336.8 billion, down from $401.8 billion as of June 30, 2009 and from $349.9 billion reported as of March 31, 2010. Average managed assets were $337.1 billion, down from $414.4 billion in the year-ago quarter and from $366.9 billion in the prior quarter.

At quarter-end, fixed-income assets increased 32% year over year and 7% from prior quarter to $38.0 billion. Equity assets came in at $26.8 billion, up 2% year over year but down 11% from the prior quarter. However, money market assets in both funds and separate accounts declined by 25% year over year and 4% from the prior quarter to $260.5 billion.

At the end of the quarter, cash and other short-term investments were $283.1 million, up from $122.0 million at the end of December 31, 2009. However, total long-term debt was $391.4 million, up from $118.6 million at the end of December 31, 2009. During the reported quarter, Federated Investors purchased 178,600 shares of Federated Class B common stock for $3.9 million.

Dividend Update

The board of Federated Investors declared a quarterly dividend of 24 cents per share, which will be payable on August 13, 2010 to shareholders of record as on August 6, 2010.

Federated’s closest competitor, BlackRock Inc. (NYSE:BLK) also reported lower AUM for the second quarter of 2010, attributable to adverse equity markets and foreign exchange movements.

The financial services industry had been the hardest hit by the economic crisis in 2008 and Federated Investors was one jolted by the credit crunch. However, the company is now in a restructuring and recovering phase, hence the bumps in the ride are justified at the moment.

Nevertheless, the near-term outlook remains cautious and we remain on the edge before the markets score a strong and steady rebound that will help increase market activity and generate client demand. Overall, the company has the potential for substantial growth in the long run, given its fairly healthy balance sheet, firm cost-cutting initiatives and a diversified asset and product mix.

Federated currently retains the Zacks #3 Rank which translates into a short-term Hold rating. Considering the fundamentals we are maintaining our Neutral recommendation on the stock.

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