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Disturbing Earnings Trends At T. Rowe, Legg Mason
Posted February 3, 2012
We Recommend...
By Takeover Analyst
Despite its recent rise for the year, Janus Capital (JNS) still receives an overall bearish rating on the Street. The investment services firm is rated closest to a "sell" - on par with the rating for Legg Mason (LM) but below that for T. Rowe (TROW). Based on my multiples analysis and DCF model, I find limited upside for all 3 firms at present time.
From a multiples perspective, T. Rowe is the most expensive of the three. It trades at a respective 20.2x and 16.3x past and forward earnings with a dividend yield of 2.1%. Janus and Legg Mason trade at a respective 10.6x and 18.1x forward earnings.
At the third quarter earnings call Janus' management noted strong management of operating expenses:
"Average AUM of $149.2 billion declined 4%. Revenue of $215 million declined 9% due to the decline in average AUM and an increase in negative performance fees.
Fourth quarter operating expenses were $145 million, which was $18 million or 11% lower than the prior quarter. Operating income of $70.6 million declined 5% quarter-over-quarter, as the 9% revenue decline was off by -- offset by an 11% decline in operating expenses. Operating margins for the quarter of 32.7%".
T. Rowe beat expectations with EPS at $0.73 (5.8% above consensus). Even still, the top-line fell 1% sequential and LT inflows grew organically by an annual rate of only 1%. This will cause investors to reevaluate T. Rowe's premium and inevitably put pressure on multiples. Institutional outflow during the same period declined 2% organically as clients de-risk. With capital expenditures of $300M in 2012, buyback activity is looking more like it will decline. On the other hand, the firm has a stellar brand, great scale, and is attractive in terms of stable revenues. Nearly nine out of ten funds have outperformed peers over a 5-year span. READ FULL ARTICLE HERE
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