Asset managers' earnings reports will flood in this week, and analysts have ratcheted down expectations for the period because of the market's weakness and lingering questions about rising interest rates and a broader economic slowdown. But even as asset managers might have been burned in the second quarter by the market's decline and lighter cash flows from investors, analysts say the sector's recent woes have sent the lofty stocks to more reasonable prices. The slew of fund manager reports kicks off with Legg Mason ( LM) and Waddell & Reed ( WDR) on Tuesday. Calamos Asset Management ( CLMS) and AllianceBernstein ( AB) follow on Wednesday. Thursday will be the biggest day for asset manager releases, with giants T. Rowe Price ( TROW), Janus ( JNS), Amvescap ( AVZ), Franklin Resources ( BEN) and Federated Investors ( FII) all reporting results. Merrill Lynch analyst Guy Moszkowski recently trimmed his second-quarter earnings estimates for the group by an average of 2%, and his full-year forecasts by 2.6%. "We are adjusting estimates just ahead of the reporting season, lowering estimates to reflect equity declines in 2Q and what was probably a fairly slow net-flow quarter for many managers," Moszkowski wrote in a research note. But he pointed out that "even so-so earnings may be greeted with relief," because the expectations are low for the quarter in light of the equity selloff and the first-quarter disappointments from Legg Mason and Janus. Moszkowski also noted that lowered estimates are already reflected in share prices for many managers, and that they are "finally trading at more typical historical levels." Matt Snowling, an analyst with Friedman Billings Ramsey, also sees a potential buying opportunity for stocks that he had seen as overvalued. "Although we have been unenthusiastic on asset manager stocks for several months, the recent selloff, coupled with still-strong cash flow generation, is now making the group more appealing for investors willing to stomach the market volatility," he wrote in a research note.
Snowling says that asset managers with higher equity exposure will falter in the second quarter, but "previously dull-looking fixed-income performance (averaging nearly break-even quarter-to-date returns) will likely weather the storm better." For example, Nuveen Investments ( JNC) has made an effort to expand its equities products while still keeping a lock on the fixed-income market. The company's earnings last week showed positive results from the diversification. Second-quarter net income rose 13% to $46.4 million, or 56 cents a share, from $40.1 million, or 50 cents a share, a year earlier. The earnings were in line with estimates from Thomson First Call. Revenue rose to $172.2 million from $138.9 million, beating analysts' average forecast by $3.6 million. Net inflows jumped $5.07 billion from $3.45 billion a year earlier. The company had $148.99 billion in assets under management at the end of the quarter, up from $124.02 billion in the same time the previous year. "Our increased focus on mutual funds continues to accelerate the growth of our product line and our assets under management," Nuveen Chief Executive Tim Schwertfeger said in the company's earnings release. Aside from fixed income, mangers with strong exposure to international equities might do well. The slide in the dollar should help boost results, despite weakness in international markets, Snowling says.
Cherry-PickingWhile the market's decline will dampen near-term earnings momentum, Snowling believes that this may have spurred increased buyback activity by the asset managers. He notes that many of the firms have large stockpiles of cash, and buybacks could mitigate the negative earnings impact of the market. Among specific companies, Snowling believes that Franklin Resources, which showed that its assets under management held steady during the selloff, could report decent results. "Assets still traced better than our model and the share count tracked lower due to an aggressive buyback," he wrote.
With considerable excess capital on the books, Snowling expects Franklin to continue buying back stock. He gives the company an outperform rating and a $105 price target from its current price near $85. Merrill's view on Franklin is a bit more cautious, even though the brokerage maintains a "buy" rating on the firm. "Large investment income makes Franklin's EPS volatile," wrote Moszkowski, though he says he expects Franklin to meet Wall Street's estimates. Snowling also believes that AllianceBernstein's net flow momentum is among the strongest of the group, and says this should help should lift its earnings. He also says the odds are good that that T. Rowe Price took advantage of the selloff to buy back stock, since it has no debt on the books. JPMorgan's Ken Worthington gives T. Rowe Price an "overweight" rating. "We believe
T. Rowe is one of the best long term investments in asset management. Its strong long term performance track record, consistent sales, solid expense management and impeccable reputation for integrity has made it a core investment in the sector," Worthington wrote in a note, adding that the company has been a solid relative performer during periods of market disruption. On the downside, Worthington warns that Janus is particularly exposed to the recent market downturn "since it has little flexibility to lower costs and its core growth franchise continues to experience net redemptions." Besides Nuveen, one other big asset manager has already reported. BlackRock ( BLK) last week said its second-quarter net income jumped to $63.4 million, or 95 cents a share, up from $53.3 million, or 80 cents a share, a year earlier. Excluding charges related to the company's pending purchase of Merrill Lynch's ( MER) investment management business and other costs, adjusted earnings were $1.19 a share. Analysts expected earnings of $1.17 a share, before items. Assets under management totaled $464.07 billion at June 30, up from $414.41 billion a year earlier and $463.06 billion at March 31.