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Franklin Resources: S&P Bets on BEN
12/19/2014 8:00 am EST
Our latest Focus Stock—which carries S&P Capital IQ's highest investment recommendation of 5-Stars, or Strong Buy—is one of the largest publicly-traded asset managers, explains Erik Oja, S&P Capital IQ Equity Analyst in Standard & Poor's Marketscope.
We expect steady assets under management (AUM) and revenue growth at Franklin Resources (BEN).
The company offers muni debt, blended, high-yield debt, international equity, and value equity funds, many of which have lower-than-peers expense ratios and higher-than-peers performance.
We also view BEN's AUM and revenue growth as less volatile than peers. Also, yearly revenue growth has outpaced yearly expense growth in 14 of the last 18 quarters, a trend we expect to continue for at least the next six quarters. Finally, BEN's operating margin of nearly 40% is above peers.
BEN's global and hybrid fixed-income strategies have done particularly well on flows, as we believe global investors ready themselves for a possible rise in US interest rates.
The firm’s family of funds have been and should remain attractive to fund investors. This underpins our view that BEN's AUM growth should be steady, with lower variability than at peers.
Steady AUM growth has led to faster than peer revenue growth. BEN's revenues increased at an average annual rate of 17% since Q1 2009, far better than the industry's 10.2% annual growth rate.
BEN's worst year was 2012, when revenues fell just 1.1%. In 2010-2013, a volatile period which saw the US losing its AAA debt rating and several severe banking crises in Europe, some of BEN's peers recorded annual revenue declines of 12% to 17%.
BEN has also managed expenses well, thus driving operating leverage, a trend we see continuing. Expenses rose 4.1% in the year ended September 30, compared to 6.4% revenue growth.
We see EPS of $4.07 in FY (Sep) 15, up 7.4%, and we see FY 16 EPS of $4.28, up 5.2%. Capital IQ consensus views are $3.89 and $4.32, respectively.
BEN is fairly aggressive about returning capital to shareholders, with share repurchases and dividends just shy of $1.0 billion in FY 14. We have a 12-month target price of $66 on these shares, based on an above-peer 16.2 times our forward EPS estimate of $4.07.
Risks to our recommendation, EPS estimates, and target price include potential depreciation in global equity and bond markets, fund underperformance, new regulations, and greater asset redemptions.
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