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Federated Investors – Well Positioned for Total Return

May 21, 2009 | About:
Federated Inv. [NYSE:FII] May 20, 2009: $22.19

52-week range: $15.80 (Dec. 29, 2008) - $36.63 (Sep. 19, 2008)

Dividend = $0.24 quarterly = 4.32% current yield


• Federated provides investment-management services to institutions and individuals. The company offers 158 funds as well as management of separate accounts. Of the company's managed funds, 50 are money market funds, 51 are fixed-income funds, and 57 are equity funds. Its money market funds represent more than 80% of its managed assets. Its largest equity fund, the Federated Kaufmann Fund, represented 13% of its annual revenue in 2008.

• Company profile from Morningstar.


Federated’s focus on fixed-income and money market funds has paid off during the trying market conditions of the past year. 2008 saw all-time high earnings per share of $2.20 and was the eighth year of the past ten with higher year-over-year results. Dividends grew in each of the past 10 years climbing from an annual rate of $0.11 to the current $0.96 /share.

First quarter earnings were down this year due to waived fees on Treasury funds (related to ultra-low tsy yields) and a non-recurring write-down of thirteen cents a share on the value of intangible assets from prior acquisitions.

Including that impairment charge Zacks sees 2009 and 2010 earnings of $1.84 and $1.98 respectively. That puts Federated’s multiple at just 12x this year’s and 11.2x next year’s expectations. Compare that with their historical P/Es from past years…

Year ….. Sales …... C/F …... EPS …... Div ….... B/V ….. Avg. P/E

1999 ….. 4.90 ….. 1.07 …. 0.96 ….. 0.11 ….. 0.97 …… 12.5x

2000 ….. 5.81 ….. 1.40 …. 1.27 ….. 0.14 ….. 1.26 …… 17.1x

2001 ….. 6.20 ….. 1.72 …. 1.44 ….. 0.18 ….. 2.06 …… 20.3x

2002 ….. 6.32 ….. 1.98 …. 1.74 ….. 0.22 ….. 3.03 …… 17.3x

2003 ….. 7.58 ….. 2.07 …. 1.83 ….. 0.30 ….. 3.64 …… 15.0x

2004 ….. 7.92 ….. 2.03 …. 1.77 ….. 0.41 ….. 4.28 …… 17.0x

2005 ….. 8.49 ….. 2.08 …. 1.84 ….. 0.58 ….. 5.05 …… 17.0x

2006 ….. 9.42 ….. 2.07 …. 1.80 ….. 0.69 ….. 5.10 …… 19.3x

2007 …..11.08 …. 2.39 …. 2.12 …...0.81 ….. 5.64 …… 17.8x

2008 …..11.97 …. 2.41 …. 2.20 …...0.93 ….. 4.14 …… 14.8x

Statistics are as reported by Value Line.

It is noteworthy that the only other times these shares approached 12x earnings was in 1999 and during the recent panic sell-off. Buyers at the low in 2003 saw their (split-adjusted) shares climb from $10 to $31.70 in under two years. Investors who picked up FII shares in late December, 2008 have already seen a 40% gain.

Federated runs a tight ship. They have shown operating margins averaging over 37% over the past decade. Unlike most asset management firms they actually posted a 21% increase in assets under management [AUM] year-over-year in the March 2009 quarter.

As the equity markets recover and the interest rate environment turns more normal, I expect to see both their AUM and profit margins increase quite dramatically.

The generous and well covered dividend yield is 4.32% right now. That’s better than what you can earn presently on 10-year Treasuries and bank CDs. Federated’s balance sheet looks good and capital spending needs are minimal.

Value Line rates FII ‘above average’ for safety and gives them an ‘A’ for financial strength. They garnered 70th and 100th percentile rankings for ‘stock price stability’ and ‘earnings predictability’ (with 100th being best).

Morningstar echoes those sentiments with a 4-Star (out of 5) overall rating and a present day ‘fair value’ estimate of $30 /share.

If Federated merely returns to a lower than normalized, fourteen multiple by next January, my target price becomes 14 x $1.84 = $25.76 /share.

Here’s a nice way to play these shares for that eight month period:

Buy 1000 FII @$22.19 ……...$22,190

Sell 10 Jan. $25 calls @$1.90 ………..…$1,900

Sell 10 Jan. $25 puts @$5.20 …….…….$5,200

Net Cash Out-of-Pocket …….$15,090

On Jan. 16, 2010 if Federated shares are $25 or higher

(up 12.7% from today’s quote):


The $25 calls will be exercised.

You will sell your shares for $25,000.

The $25 puts will expire worthless- a good thing for you as a seller).

You will have collected $480 in dividends.

You will have no further option obligations.

You will hold no shares and $25,480 cash for your original net

outlay of $15,090.

That’s a best-case scenario net profit of $10,390 / $15,090 = 68.8%.

This would be achieved as long as FII had gone up by at least 12.7% from the trade inception price of $22.19/share.



What’s the risk?


On Jan. 16, 2010 if Federated shares are below $25:

The $25 calls will expire worthless.

The $25 puts will be exercised.

You will be forced to buy another 1000 shares and to lay

out an additional $25,000 cash.

You will have collected $480 in dividends.

You will have no further option obligations.

You will own 2000 shares of FII and hold $480 cash.


What’s the break-even point on the whole trade?

On the first 1000 shares it’s the $22.19 cost less

The $1.90 /share call premium = $20.29 /share.

On the ‘put’ shares it’s the $25 strike price less

The $5.20 /share put premium = $19.80 /share.

Your average cost would be…

$20.29 + $19.80 / 2 = $20.05 minus $0.48 /sh. in dividends = $19.57 /sh.

Federated shares could drop by as much as $2.62 /sh. Or (-11.8%) without

causing a loss on this trade.


At $19.57 you’d own the 2000 shares at < 10.7x what we expect will be trailing earnings of $1.84. You’d also have a projected dividend yield of 4.9% or higher.

FII shares did not trade below $23.30 ever from January 1, 2001 right through

August of 2008. Highs in each of those eight years ranged from $31.90 to $45.

If you had to own extra shares at $19.57 it’s a good bet you’ll get a chance to

sell later for a very nice gain.

Since you’d be writing in-the-money puts in this example you should be sure to have the extra $25,000 in reserve should you actually be ‘put’ the additional shares between now and January 16th.

Summary:

Federated Investors is a high-quality, good yielding stock near the bottom of its historical valuation range. If our best-case plays out, you can make a cash-on-cash return of over 68% in eight months. If FII shares fail to reach $25 you’re still protected from loss on anything less than an 11.8% decline.


Disclosure: Author is long FII shares and short FII options.

NOTE: With the futures down pre-market you can now buy FII even cheaper than the indicated $22.19 close from May 20th.

FII shares and the call prices will be lower and put prices will be higher than in the write-up.

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.TalkMarkets.com

Visit Dr. Paul Price's Website


Rating: 3.6/5 (9 votes)

Comments

Dr. Paul Price
Dr. Paul Price premium member - 5 years ago
May 29, 2009, 12:33 p.m. EST

SAN FRANCISCO (MarketWatch) -- Federated Investors Inc.

(FII 24.43, +0.47, +1.96%) said Friday that it acquired about $233 million in equity assets from two Touchstone Advisors Inc. mutual funds.

About $151 million of the assets came from the Touchstone Value Opportunities Fund and will be reorganized with the Federated Clover Value Fund, and about $82 million from the Touchstone Diversified Small Cap Value Fund will be reorganized with the Federated Clover Small Value Fund.

Financial terms of acquisition were not disclosed.

Dr. Paul Price
Dr. Paul Price premium member - 4 years ago
Federated Investors, Inc. Reports Second Quarter 2009 Earnings

- Net bond fund sales reach $2.6 billion for Q2 2009 - Q2 2009 combined equity and bond fund gross sales up 57% compared to Q2 2008 - Board declares quarterly dividend of $0.24 per share

Source: Federated Investors, Inc.

PITTSBURGH, July 23 /PRNewswire-FirstCall/ -- Federated Investors, Inc. (NYSE: FII - News), one of the nation's largest investment managers, today reported earnings per diluted share from continuing operations (EPS) of $0.52 for the quarter ended June 30, 2009 compared to $0.54 for the same quarter last year. Income from continuing operations was $53.3 million for Q2 2009 compared to $55.2 million for Q2 2008.

Federated reported YTD 2009 EPS of $0.86 compared to $1.08 for the same period in 2008. For the six months ended June 30, 2009, income from continuing operations was $88.4 million compared to $111.0 million for the same period in 2008.

Federated's total managed assets were $401.8 billion at June 30, 2009, up $68.3 billion or 20 percent from $333.5 billion at June 30, 2008 and down $7.4 billion or 2 percent from $409.2 billion reported at March 31, 2009. Average managed assets for Q2 2009 were $414.4 billion, up $71.1 billion or 21 percent from $343.3 billion reported for Q2 2008 and up $2.7 billion from $411.7 billion reported for Q1 2009.

"Investor confidence in Federated's diverse line of equity and bond products drove strong mutual fund sales in the second quarter," said J. Christopher Donahue, president and chief executive officer. "Federated's fixed-income fund net sales surged to $2.6 billion in the quarter, while Federated's equity fund flows were positive for the quarter."

Federated's board of directors declared a quarterly dividend of $0.24 per share. The dividend is payable on August 14, 2009 to shareholders of record as of August 10, 2009. During Q2 2009, Federated purchased 238,400 shares of Federated class B common stock for $5.8 million.

Federated's fixed-income assets were $28.7 billion at June 30, 2009, up $5.7 billion or 25 percent from $23.0 billion at June 30, 2008 and up $3.7 billion or 15 percent from $25.0 billion at March 31, 2009. Federated had strong net inflows of $2.6 billion into its bond funds during Q2 2009 compared to $1.1 billion in Q1 2009. Net sales were driven by strong flows into ultrashort bond funds and intermediate-term bond funds including Federated Total Return Bond Fund and Federated Total Return Government Bond Fund.

Federated's equity assets were $26.2 billion at June 30, 2009, down $11.1 billion or 30 percent from $37.3 billion at June 30, 2008 and up $2.8 billion or 12 percent from $23.4 billion at March 31, 2009. During the second quarter of 2009, Federated's net flows into equity funds turned positive with $26 million in net sales. Flows were driven by sales in Federated Market Opportunity Fund and Federated Prudent Bear Fund, both of which invest in alternative-asset classes, and Federated Strategic Value Fund, a dividend-focused fund.

Money market assets in both funds and separate accounts were $346.4 billion at June 30, 2009, up $75.3 billion or 28 percent from $271.1 billion at June 30, 2008 and down $13.7 billion or 4 percent from $360.1 billion at March 31, 2009. Money market mutual fund assets were $312.8 billion at June 30, 2009, up $72.2 billion or 30 percent from $240.6 billion at June 30, 2008 and down $16.0 billion or 5 percent from $328.8 billion at March 31, 2009.

Dr. Paul Price
Dr. Paul Price premium member - 4 years ago




This week’s Barrons [dated Oct. 12, 2009] has a very favorable article on Federated Investors (FII).

This high-yielding and conservative stock has excellent total return potential with very low risk.

Unlike most stocks, FII has not yet run to fairly valued or overvalued levels with the recent market surge. Their yeld alone makes them better than almost all fixed income returns now available and without the risk of higher rates torpedoing your principal.
Dr. Paul Price
Dr. Paul Price premium member - 4 years ago


Federated Investors declared a $1.50 dividend - the $0.24 regular plus a $1.26 special payout- payable February 12 to shareholders of record Feb 5, 2010.

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