Federated Investors Inc. (NYSE:FII) earnings per share second-quarter 2011

Federated Investors Inc. (NYSE:FII) earnings per share second-quarter 2011 ; Federated Investors Inc. (NYSE:FII) reported second-quarter 2011 earnings per share of 41 cents, in line with the Zacks Consensus Estimate, and below the year-ago earnings of 46 cents. Moreover, the reported earnings were below 43 cents per share reported in the prior quarter.

Results reflected decreased top-line growth, increase in voluntary fee waivers, and augmented operating expenses on a year-over-year basis. This was partly offset by a rise in fixed income and equity assets, higher assets under management (AUM) and a decline in the amortization of deferred sales commissions.

Performance in Detail
Total revenue inched down 2% year over year to $225.8 million and was below the Zacks Consensus Estimate of $243.0 million. The decline was primarily attributable to an increase in voluntary fee waivers, partially offset by a surge in higher revenue related to average money market, fixed-income and equity assets. Moreover, revenue slipped 5% sequentially, owing to an increase in voluntary fee waivers and lower average money market assets.

During the reported quarter, Federated derived 45% of its revenue from money market assets, 54% from fluctuating assets (34% from equity assets and 20% from fixed-income assets) and 1% from other products and services.

Total operating expenses inched up 4% year over year to $153.7 million, primarily reflecting higher professional services fees. However, expenses surged down 16% sequentially due to lower professional service fees related to non-recurring legal charges and lower distribution expense resulting from an increase in fee waivers.

Assets Position
As of June 30, 2011, total AUM was $349.4 billion, up 4% from $336.8 billion as of June 30, 2010 and down 2% from $354.9 billion reported as of March 31, 2011. Average managed assets were $354.2 billion, up from $337.1 billion in the year-ago quarter and down from $356.3 billion in the prior quarter.

At quarter end, fixed-income assets increased 12% year over year and 1% sequentially to $42.4 billion. Equity assets came in at $31.4 billion, up 17% year over year and down 1% from the prior quarter. Further, money market assets in both funds and separate accounts climbed 2% year over year and slipped 2% sequentially to $265.7 billion. Money market mutual fund assets were $236.1 billion in the quarter, up 2% year over year and down 1% sequentially.

As of June 30, 2011, cash and other investments were $294.1 million, down from $317.5 million as on March 31, 2011. However, total long-term debt was $435.0 million, up from $353.0 million as on March 31, 2011.

Share Repurchase and Dividend Update
During the reported quarter, Federated Investors purchased 338,512 shares of Federated Class B common stock for $7.4 million.

The board of Federated Investors declared a quarterly dividend of 24 cents per share, payable on August 15, 2011 to shareholders of record as of August 8, 2011.

Competitor Performance
Federated’s closest competitor, The Blackstone Group’s (NYSE:BX) second-quarter 2011 economic net income (ENI) was 63 cents per share, substantially outpacing the Zacks Consensus Estimate of 34 cents, as well as the prior-year quarter’s ENI of 18 cents. ENI came in at $703.3 million for the reported quarter compared with $205.2 million in the year-ago quarter.

The increase was primarily driven by improved investment performance in all the segments. The upbeat performance was aided by strong revenue growth, improved equity markets and lower operating expenses. Blackstone’s AUM also continued to show significant growth.

Our Take
We expect downward pressure on AUM, flows and margins. Regulatory backdrop, waning equity markets and sluggish global economic growth are anticipated to keep earnings under pressure. However, Federated has the potential for substantial growth in the long run, given its fairly healthy balance sheet and a diversified asset base as well as product mix. Nevertheless, the near-term outlook remains cautious and we wait for a strong and steady rebound that will help increase market activity and regenerate client demand.