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Omar Venerio
ovenerio
Articles (1681) 

I Believe AUM Will Continue the Uptrend

October 24, 2014 | About:

In this article, let's take a look at Franklin Resources Inc. (NYSE:BEN), a $33.07 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 giant

Franklin Resources is one of the largest U.S. money managers, with $898 billion in assets under management at September 2014. Fixed-income investments represent 39% of assets under management, equity investments 42%, hybrid plus balanced funds 18% and money funds 1%.

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 residing 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 company focuses on diversifying its operations. 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 (NYSE:BLK), Vanguard, Invesco (NYSE:IVZ) and State Street (NYSE:STT).

Bond portfolio

The bond portfolio 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.

Low barriers

In an industry with low barriers, asset managers take advantage over smaller players because it is difficult to gain scale. 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, revenues increased by 2.19% and earnings per share decreased in the most recent quarter compared to the same quarter a year ago ($0.92 vs $0.86).

During the past fiscal year, the company increased its bottom line. It earned $3.36 versus $2.98 in the previous year. This year, Wall Street expects an improvement in earnings ($3.69 versus $3.36).

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

21.45

STT

State Street

10.00

BLK

BlackRock

15.17

CIXPF

CaixaBank S.A.

1.64

 

Industry Median

7.47

The company has a current ROE of 21.45% which is higher than the one exhibit by its peers State Street, BlackRock and CaixaBank S.A. (CIXPF). 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.

1414151942751.png

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 14.8x, trading at a discount compared to an average of 19.1x for the industry. To use another metric, its price-to-book ratio of 2.93x indicates a premium versus the industry average of 1.01x while the price-to-sales ratio of 3.99x is below the industry average of 7.13x. Two of them 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 $15,838, which represents a 9.7% compound annual growth rate (CAGR).

1414151927291.png

Final comment

Franklin is one of the 10 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.

I expect the uptrend in AUM to continue as markets are improving. Valuation is another key reason to consider Franklin as an investment.

In this opportunity, I would recommend fundamental investors to consider this Zacks Rank #3 (Hold) for their long-term portfolios.

Hedge fund gurus like Robert Olstein (Trades, Portfolio), Bill Nygren (Trades, Portfolio), Chuck Royce (Trades, Portfolio), John Rogers (Trades, Portfolio), Jeff Auxier (Trades, Portfolio), Ken Fisher (Trades, Portfolio) and Richard Pzena (Trades, Portfolio) added this stock to their portfolios in the first quarter of 2014, as well as Diamond Hill Capital (Trades, Portfolio).

Disclosure: Omar Venerio holds no position in any stocks mentioned

About the author:

ovenerio
Omar Venerio is a capital markets, derivatives, corporate finance and financial management professor and Area Head of Finance. He is passionate about the stock market and providing independent fundamental research and hedge fund and insider trading-focused investigation.

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