Waddell & Reed Beats on EPS - Analyst Blog

By Zacks | January 30, 2013 AAA

Waddell & Reed Financial Inc.'s (WDR) fourth-quarter 2012 earnings from continuing operations reached 61 cents per share, slightly ahead of the Zacks Consensus Estimate of 58 cents. This also compares favorably with earnings of 46 cents in the prior-year quarter.

For full year 2012, earnings from continuing operations stood at $2.25 per share, marginally above the Zacks Consensus Estimate of $2.22. This compares with earnings of $2.01 per share in 2011.

Better-than-expected results benefited from augmented top line, partially offset by higher expenses. Further, enhanced assets under management (AUM) and solid balance sheet were among the positives. Moreover, gross sales across all the revenue channels, except Wholesale channel, decreased.

Net income from continuing operations for the reported quarter came in at $52.4 million increasing 33.0% from $39.4 million in the year-ago quarter. For 2012, net income stood at $192.5 million, up 11.8% from $172.2 million in 2011.

Performance in Detail

Waddell & Reed's operating revenues for the reported quarter climbed 11.1% to $302.9 million from $272.6 million in the year-ago quarter. Also, operating revenues marginally beat the Zacks Consensus Estimate of $301.0 million by 0.6%.

For the full year, operating revenues were $1.2 billion, up 4.6% from $1.1 billion in 2011. However, it missed the Zacks Consensus Estimate by 4.8%.

Overall, gross sales increased 1.5% year over year to $5.1 billion. Redemptions were $5.6 billion, up 7.1% from $5.2 billion in the prior-year quarter. Outflows were $165 million as against inflows of $42 million in the prior-year quarter.

At the Advisors channel, revenues bolstered 13.3% year over year to $83.1 million. Gross sales were reported at $1.1 billion, surging 24.4% from $858 million in the year-ago quarter. Net outflows came down to $75 million from $114 million in the year-ago period.

At the Wholesale channel, revenues improved 8.3% from the prior-year quarter to $45.7 million. Similarly, gross sales dipped 6.5% from the year-ago quarter to $3.5 billion. Net outflows were $77 million compared with inflows of $153 million in the prior-year quarter.

Gross sales at the Institutional channel came at $562 million, jumping 23.2% from $456 million in the year-ago quarter. However, this segment witnessed net outflows of $13 million compared with inflows of $3 million in the year-ago quarter.

Waddell & Reed's operating expenses hiked 4.3% year over year to $219.5 million. The increase was primarily due to higher underwriting and distribution expenses along with compensation and related costs.

Operating margin of 27.5% in the reported quarter improved from 22.8% in the prior-year quarter.

As of Dec 31, 2012, AUM totaled $96.4 billion, up 15.9% from $83.2 billion as of Dec 31, 2011.

Balance Sheet

As of Dec 31, 2012, cash and cash equivalents and investment securities (after payment of special dividend of $85 million) stood at $504 million. Moreover, long-term debt totaled $190 million and stockholders' equity was recorded at $510 million.

Share repurchase

During 2012, Waddell & Reed repurchased 1.5 million shares at an aggregate price of $49 million.

Performance of Other Asset Mangers

T. Rowe Price Group, Inc. (TROW) reported its fourth-quarter 2012 earnings, a penny below the Zacks Consensus Estimate. Elevated operating expenses were the primary reasons for the earnings miss. Yet, top-line growth and increased assets under management (AUM) were the positives.

BlackRock Inc.'s (BLK) fourth-quarter 2012 adjusted earnings substantially surpassed the Zacks Consensus Estimate. The improvement was primarily attributable to increased top line, partly offset by higher operating expenses. Moreover, augmented AUM was the other positive.

Our Take

Waddell & Reed's sustained growth and history of boosting shareholders' value through meaningful capital deployment activities are impressive. However, the persistently volatile equity markets and significant intangibles on its balance sheet are expected to mar its profitability in the upcoming quarters.

Although we remain optimistic on the competitive ranking of Waddell & Reed's funds and its efforts to control cost in the upcoming quarters, irregular investment performance and rising competition make us cautious.

Waddell & Reed currently retains a Zacks Rank #3 (Hold). Virtus Investment Partners Inc. (VRTS) is a better performing stock in the financial sector carrying a Zacks Rank #1 (Strong Buy).

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