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Morningstar | Equity and Fixed-Income Outflows Mar Federated's 2Q Results; Lowered FVE to $30 per Share

We've lowered our fair value estimate for narrow-moat Federated Investors to $30 per share from $33 after the firm posted much weaker second-quarter results than we were expecting. Federated closed out the June quarter with $379.7 billion in assets under management, down 3.2% sequentially but up 5.4% year over year. Equity AUM of $62.9 billion was down 1.6% sequentially and 4.3% year over year. Equity outflows of $2.3 billion during both the March and June quarters represent big setbacks for the firm, as they were not only the worst quarterly flows ever for Federated on an absolute basis but the worst organic growth rate for equities since the 2008-09 financial crisis. Results for the company's fixed-income operations were less dire, with the platform closing out the June quarter with $61.5 billion in AUM, down 1.2% sequentially but up 17.1% year over year, with minimal outflows. Federated did, however, report $10.7 billion in outflows from its money market operations, which ended the second quarter with $255.2 billion in AUM.

During the June quarter, Federated derived 61% of revenue from its equity (44%) and fixed-income (17%) platforms, with the rest coming from its money market operations. Although average AUM was up 7.2% year over year, second-quarter revenue declined 6.2% as realization rates for each of Federated's main segments declined. First-half top-line growth of negative 4.8% was at the lower end of our forecast calling for a low- to mid-single-digit decline in revenue this year (which we have revised to a mid-single-digit decline given our expectation that equity outflows will continue for some time). As for profitability, Federated's first-half operating margins of 30.9% were 120 basis points higher than 2017 levels, but with the company expected to incur additional transaction-related and integration costs associated with the Hermes acquisition in the back half of the year, we'd be surprised to see full-year results much higher than 30%.