Asset managers are expected to shift their earnings into overdrive when they report quarterly results this week. So why are so many analysts sticking the stocks with a "neutral" rating?
Most research analysts penciled in 2% market appreciation when they made their earnings estimates for the group before the start of the first quarter. The market had different plans, though, as the
rose 4% from January through March. The asset managers, which are leveraged to stock performance, went along for the ride.
As a result, the analyst community has been fast and furiously raising quarterly and yearly estimates on the group since late March to reflect the market's rising tide. But in most cases, analysts' haven't raised their ratings on the stocks, mostly due to creeping valuations.
T. Rowe Price
, for example, releases its profit report Wednesday before the bell. According to Thomson First Call, analysts have an average estimate for the company to post a profit of 82 cents a share and revenue of $419.2 million, up from last year's first-quarter net of 69 cents a share and revenue of $357 million.
Despite the anticipated double-digit jump in profits, analysts Patra Chakshuvej of JPMorgan and Rob Lee of Keefe Bruyette & Woods aren't expecting the stock to perform any better than the rest of the market going forward. Both recently raised their first-quarter and 2006 earnings estimates to reflect increased assets under management, while holding their neutral ratings on the stock.
In an April 13 research note, Chakshuvej attributed her lukewarm rating on T. Rowe's stock to the fact that it currently trades at 11.7 times the basis of her calculation of "firm value" to 2006 expected EBITDA, above the peer average of 11.2.
Lee chooses a different valuation method to come up with his market perform rating. In his March 29 note, Lee raised his price target to $83 a share to reflect the impact of the higher EPS and cash flow forecasts on his discounted cash flow model, or DCF. He wrote, "while we believe that TROW remains well-positioned to continue to generate a steady rate of positive net flows, we believe the positive outlook is reflected in the stock."
Lee does rate
, which also reports Wednesday, as an "outperform" based on his trusty DCF results. Analysts expect the company to post a profit of 80 cents a unit, up from the 58 cents it earned last year, on sales of $826.4 billion. Earlier this month, AllianceBernstein reported that assets under management increased to $617 billion in March, up about $9 billion, or 1.5%, from February.
reports its fiscal second-quarter results, and, again, the analyst community is worried that the shares have become too pricey.
"We believe its valuation already incorporates a high degree of optimism towards future performance and flow expectations," writes Chakshuvej, who rates Franklin neutral.
Analysts predict Franklin will post a profit of $1.20 a share and sales of $1.23 billion. A year earlier, Franklin earned 85 cents a share, with sales of $704 million. Franklin reported assets under management of $491.6 billion for the month ended March 31, compared with $484.6 billion in the preceding month and $412.1 billion at the same time a year earlier.
One of the few analysts to break ranks on Franklin, however, is Friedman Billings Ramsey's Matt Snowling, who says that with $4 billion in cash available, the firm is a potential asset acquirer. And from a valuation perspective, he says, it trades at a discounted 16.3 times his 2007 earnings estimate, vs. 17.6 times for its peers.
Also reporting Thursday will be
. Analysts, on average, expect the Denver-based asset manager to report earnings of 17 cents a share and sales of $248.3 million. A year earlier, the company earned 11 cents a share on revenue of $235.2 million.
At Dec. 31, Janus' assets under management totaled $148.5 billion, compared with $139.4 billion at the end of the third quarter.
But while assets -- and earnings -- are steadily moving higher at Janus, especially at its quantitatively driven INTECH funds, the analyst community voices more words of caution.
Says Mark Lane, analyst at William Blair, "Although investment performance continues to improve within the Janus branded business, INTECH's momentum is strong, and management appears to be executing, valuation is not cheap in the context of peak multiples for asset managers, in our opinion."
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