Asset Manager Earnings Should Be Strong

Asset managers are expected to post impressive fourth-quarter earnings when they report in bulk this week. Unfortunately, most analysts believe the good times are already reflected in the share prices.

"As a group, the asset managers finished the year on a high note, as the year-end rally and strong inflows drove asset and earnings growth for the fourth quarter and into 2006," says Matt Snowling, analyst at Friedman Billings Ramsey. Snowling expects the group's earnings for the December quarter to rise roughly 3% from a year earlier, and is looking for growth of 24% for all of 2006, up from 10% in 2005.

Despite his robust earnings forecast, Snowling believes that investors are paying too high a premium for the stocks, which is why he only has a buy rating on one member of the group, Franklin Resources(BEN).

Snowling estimates the average asset manager is trading at close to 21 times 2006 earnings, 33% higher than the S&P 500's 15.9 multiple, as well a historic high for the sector. Franklin, which reports its fiscal first-quarter results Thursday, has a forward P/E right in line with the group, yet Snowling says the company's international exposure, plus its ability to take market share, still make it a good bet. Analysts surveyed by Thomson First Call are looking for a profit of $1.12 a share and sales of $960 million. A year earlier, Franklin earned 92 cents a share, with sales of $675 million.

Franklin reported assets under management of $464.8 billion for the month ended Dec. 31, compared with $453.2 billion in the preceding month and $402.2 billion at the same time a year earlier.

Also reporting Thursday will be Snowling's least favorite member of the group, Janus Capital(JNS). Analysts, on average, expect the Denver-based asset manager to report earnings of 16 cents a share and sales of $239 million. A year earlier, the company earned 13 cents a share on revenue of $240 million.

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