Franklin Resources See Largest FI Outflows In 7 Years

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BMO Markets Capital analysts David J. Chiaverini and Richard Fellinger maintain an Outperform rating for Franklin Resources, Inc. (NYSE:BEN) as the company announces in-line FY1Q14 financial results.

Franklin Resources, Inc. (NYSE:BEN) reported FY1Q14 EPS of $0.96 (BMO $0.99, consensus $0.93).

Franklin Resources’ earnings impact and analysis

The slight miss versus our estimate came predominately from non-operating income which was $43M ($0.05/shr) below our estimate. Operating results were largely in line. Net flows were flat in the quarter (BMO -$3.5B) improving modestly from $3B of outflows last quarter. Fixed income outflows of $7B were once again a drag on AUM as concerns over rising interest rates continue to drive money out of traditional fixed income, in-line with industry trends. On the plus side, Franklin Resources, Inc. (NYSE:BEN) was able to offset those outflows with $7B of equity and hybrid inflows, the highest level since 2007. This supports our thesis that Franklin’s product offering is more diversified than it gets credit for and can perform relatively well under a rotation scenario.

Key takeaways from Franklin Resources’ earnings

Key takeaways include: 1) owing to a pricing structure change in Canada, management, servicing, and admin fees will now be bundled together; while the bottom line impact should be immaterial, management fees should increase by 120 bps and be offset by lower servicing fees and higher G&A expense, 2) the company continues to expand its product offering and global reach as K2 launched its first liquid alternatives mutual fund and a recent regulatory change now allows Chinese insurance companies to use outside mangers, 3) in line with industry trends, management noted it is starting to see signs of stabilization in tax-free fixed income flows, and 4) BEN increased its quarterly dividend by 20% to $0.12 per share; while its TTM payout ratio declined to 36% owing to its decision not to declare a special dividend in 2013, management remains committed to growing its regular dividend and reducing the share count over time.

Valuation and recommendation

We are lowering our FY2014/2015 EPS estimates for Franklin Resources, Inc. (NYSE:BEN) from $3.90/$4.20 to $3.83/$4.15 owing to the miss in the quarter. Our $65 price target is based on a sum of the parts valuation. We maintain our Outperform rating.

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