Morningstar | Equity Outflows Mar No-Moat Federated's 3Q Results; Lowered FVE to $25 per Share. See Updated Analyst Note from 30 Oct 2018
We've lowered our fair value estimate for Federated Investors to $25 per share from $30 after updating our assessments for assets under management, or AUM, flows, revenue, and profitability following the release of third-quarter results. Our new fair value estimate also incorporates the impact that our lowering of the company's moat rating from narrow to none has had on our long-term forecasts for the firm.Federated closed out the September quarter with $437.2 billion in AUM, up 15.1% sequentially and 20.2% year over year. Excluding the impact of the Hermes acquisition, which added $46.0 billion in AUM during the third quarter, the company's AUM was up 3.0% sequentially and 7.6% year over year, with most of the lift coming from its fixed-income and money market fund operations. Net outflows of $801 million were driven by net redemptions of $1.5 billion and $84 million from its equity and balanced fund operations, respectively, offset somewhat by $747 million of inflows into its fixed-income platform and another $81 million in inflows from its alternatives business. Federated did, however, report $9.0 billion of inflows from its money market operations, which ended the third quarter with $264.2 billion in AUM.
While average AUM was up 20.2% year over year, third-quarter revenue increased just 10.9% as the realization rates for each of Federated's main asset class segments declined. Year-to-date top-line growth of 0.5% was above our forecast calling for a slight decline in revenue this year but given market activity since the start of the fourth quarter is likely to end up in negative territory for the full year. As for profitability, Federated's year-to-date operating margins, which included some integration costs associated with the Hermes acquisition, of 29.3% were 115 basis points lower than 2017 levels. Backing out these costs, year-to-date operating margins were 30.8%, about 40 basis points higher year over year.
Federated Hermes is a provider of investment management products and related financial services. The company sponsors, markets and provides investment-related services to various investment products, including sponsored investment companies and other funds (Federated Funds) and Separate Accounts. The company markets these funds to banks, broker/dealers and other financial intermediaries who use them to meet the needs of customers and/or clients, including retail investors, corporations and retirement plans. The company also provides a range of services to support the operation and administration of the Federated Funds. These services include administrative services and shareholder servicing.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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