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Franklin Resources: A Different Asset Manager

July 28, 2014 | About:
ovenerio

ovenerio

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In this article, let's take a look at Franklin Resources Inc. (BEN), a $35.92 billion market cap company, which is one of the world's largest asset managers, serving retail, institutional and high-net-worth clients. Let's explore some reasons more closely to see if they are valid enough to invest in this stock.

A Global Asset Manager

More than half of its assets under management are invested in global and international strategies. Further, about one third of its AUM are provided by investors domiciled outside the U.S. Both elements provide an advantage over competitors and give a longer term growth potential in developing markets outside of the U.S.

The Diversified Nature

An important characteristic of this giant is the diversification of operations. The firm has a well-balanced product mix, equities and fixed income accounts for around 40% of total AUM (to be precise 42% equity strategies, 18% in hybrid funds, and 40% in fixed income) Reviewing the firm's product mix, a greater development of its ETF platform would be great, even though there are several players well established, like BlackRock (BLK), Vanguard, Invesco (IVZ) and State Street (STT).

The Fed Policy

When we analyze the bond portfolio, it is more weighted toward its global/international offerings, which means that is less exposed to rising U.S. interest rates. This is important considering the future environment and the fact that its competitors have their fixed-income operations to more domestically focused.

Loyalty

An industry characteristic is the lower barriers to entry. Apart from that, it is difficult to gain scale which makes that established asset managers take advantage over smaller players. Switching costs are not explicitly large, but many investors stay where they are, meaning that they maintain certain level of loyalty. This causes certain attributes such as product mix, distribution channel, geographic reach and strong brands, to be key aspects to produce differentiation.

Revenues, Margins and Profitability

Looking at profitability, the revenue growth (4.05%) has outpaced the industry average. Earnings per share decreased in the most recent quarter compared to the same quarter a year ago ($0.89 vs $0.90). During the past fiscal year, the firm increased its bottom line by earning $3.36 vs $2.98 in the prior year. This year, Wall Street expects an improvement in earnings ($3.78 vs $3.36). On Wednesday, July 30, 2014, Franklin will report its third quarter results. It declared preliminary AUM of $920.5 billion by its subsidiaries as of Jun 2014, up 1.3% from $908.3 billion as of May 31, 2014. Moreover, it surged 12.9% from $815.0 billion as of Jun 30, 2013. I believe the uptrend in AUM to continue as markets are improving.

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker

Company

ROE (%)

BEN

Franklin

21.35

STT

State Street

10.48

BLK

BlackRock

11.08

CIXPF

CaixaBank S.A.

2.07

 

Industry Median

8.21

The company has a current ROE of 21.35% which is higher than the one exhibit by its peers State Street, BlackRock and CaixaBank S.A. In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.

1406422572819.png

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 16.2x, trading at a discount compared to an average of 20.8x for the industry. To use another metric, its price-to-book ratio of 3.3x indicates a discount versus the industry average of 1.04x while the price-to-sales ratio of 4.36x is below the industry average of 7.56x. All the ratios indicate that the stock is relatively undervalued and seems to be an attractive investment relative to its peers.

As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $29.077, which represents a 23.8% compound annual growth rate (CAGR).

1406422719583.png

Final Comment

The U.S. Capital Market is mature, competitive and subject to intense competition. This sector consists of 10,000 companies with annual revenue of $15 billion and assets under management (AUM) in excess of $13 trillion.

Franklin is one of the ten largest U.S.-based asset managers, with about two thirds of its total AUM sourced from domestic clients, and is the fifth-largest manager of cross-border, long-term funds globally.

Apart from all the reasons we have already analyze, valuation is another key reason to considering Franklin as an investment. So in this opportunity, I would recommend fundamental investors to consider this Zacks Rank #2 (Buy) for their long-term portfolios.

Hedge fund gurus like Ray Dalio (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Murray Stahl (Trades, Portfolio), John Rogers (Trades, Portfolio), Chris Davis (Trades, Portfolio), Chuck Royce (Trades, Portfolio), Bill Nygren (Trades, Portfolio) and Jeff Auxier (Trades, Portfolio) added this stock to their portfolios in the first quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned

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ovenerio
We provide independent fundamental research and hedge fund and insider trading focused investigation.

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