Global investment firm Franklin Resources, Inc. (BEN) offers wealth management, technology and multi-asset solutions, and investment management to individuals, institutions, pension plans, trusts, and partnerships. An improved long-term net flow across all asset classes and strategic investment in key areas to expand its custom solutions capabilities has garnered significant investor attention. Its total assets under management (AUM) were up 3% during the first quarter of 2022 due to $24.1 billion of long-term net inflows.
The stock has declined 17.4% over the past three months to close its last trading session at $27.83. Russia’s invasion of Ukraine has caused damage to BEN’s Western Asset Core Plus Bond Fund, which held $484 million in Russian bonds.
While BEN’s strategic acquisition moves and continued efforts to diversify its business across products should strengthen its position in the market, a decline in long-term international outflows due to market fluctuations could spook investors.
Here is what could influence BEN’s performance in the coming months:
Underperforming Core-Asset Due to Market Volatility
The Russia-Ukraine war has created an obstacle for U.S. investment firms. This month, Russia banned brokers from selling securities that foreign investors owned in response to the sanctions imposed by various countries. BEN’s Western Asset Core Plus Bond Fund has declined nearly 3% since the onset of the conflict, because some 1.2% of its total assets are Russian bonds. Amid the current volatility, with further restrictions and sanctions placed on Russia, the fund is expected to continue to underperform. This could negatively impact the investment management company’s business.
Mixed Growth Story
The $0.85 consensus EPS estimate for the current quarter, ending March 31, 2022, indicates a 7.6% improvement year-over-year. However, its EPS is expected to decline 8.3% next quarter and 0.8% in fiscal 2022. Analysts expect BEN’s revenues to grow 3% year-over-year to $8.68 billion in the current year and 4.3% next year.
BEN’s revenue has increased at a 12.3% CAGR over the past three years. But its tangible book value declined at an annualized 34.9% over this period.
Mixed Financials
During the first quarter, ended Dec. 31, 2021, BEN reported total operating revenue of $2.22 billion, representing an 11% year-over-year increase, which was primarily attributable to the increase in investment management fees. But its revenue from shareholder servicing fees has declined 3% year-over-year to $47.7 million. The company’s net income declined 27% sequentially to $544.8 million. And although its operating income rose 36% from its year-ago value to $557.7 million, BEN’s direct investments in consolidated investment products, cash, and cash equivalents, and investments stood at $6.8 billion as of Dec. 31, 2021, compared to $6.9 billion as of Sept. 30, 2021.
Poor Profitability
BEN’s 42.5% trailing-12-month gross profit margin is 32.6% lower than the 63.1% industry average. In addition, its levered negative 8.3% free cash flow margin compares with the 22.2% industry average. Furthermore, its net income margin and EBIT margin are 26.7% and 4.3% lower than their respective industry averages.
POWR Ratings Reflect Uncertainty
BEN has an overall C rating, which translates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. BEN has a C grade for Growth. This is in sync with the stock’s mixed financials and growth prospects.
In terms of Quality grade, BEN has a C. The stock’s lower-than-industry gross profit margin is consistent with the Quality grade. Also, it has a Stability grade of C, which is in sync with its relatively high 1.19 beta.
In addition to the grades I have highlighted, one can check out additional BEN ratings for Sentiment, Momentum, and Value here. BEN is ranked #32 of 58 stocks in the C-rated Asset Management industry.
Bottom Line
While expanding custom solution capabilities and improved long-term net flows bode well for BEN, the stock’s upside could be limited given the investment management firm’s underperforming funds with substantial Russian holdings. Therefore, we think investors should wait for the company’s performance to stabilize before investing in the stock.
How Does Franklin Resources (BEN) Stack Up Against its Peers?
While BEN has a C rating in our proprietary rating system, one might want to consider taking a look at its industry peers, Gamco Investors, Inc. (GBL) and Diamond Hill Investment Group, Inc. (DHIL), which have a B (Buy) rating.
BEN shares rose $0.07 (+0.25%) in premarket trading Monday. Year-to-date, BEN has declined -16.90%, versus a -4.39% rise in the benchmark S&P 500 index during the same period.
About the Author: Imon Ghosh
Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.
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