Waddell & Reed (WDR, Neutral), mid-cap growth company in the finance sector, reported modest second quarter results irrespective of losing multiple important managers. While analysts consider the company as ‘From Flow Mo’ to No Mo’ and organic growth is failing; we demote stock rating to ‘Neutral’ from ‘Buy’ with price target of $66 from $71. Revenue of $400.64 million, with short fall of $5.72 million, was below consensus expectations while the earnings of $0.98 per share were above our estimates of $0.92 in this quarter.
Company has achieved success in generating first-rate organic gain in the midst of the publicly traded U.S. asset managers all the way through the last ten years. Company achieves moderate and ongoing inflows through captive brokerage, while preserving less than 10% sector-low yearly redemption rate. But company depends more on U.S. equities, with inclination for growth investing, which makes company completely leveraged on U.S. equity returns.
Total assets jumped 30% year-over-year (3% over first quarter) to a highest $135.6 billion, whereas total long term inflows of $1.2 billion came down versus the $4.7 billion in first quarter. Both funds have decelerated in sales and a lift up in redemptions from the beginning of 3Q, with company recording at least $1 billion in net outflows organization-wide till day in July. At the same time as mean AUM increased by 25 percent year-over-year, a less realization rate, which is due to changing product mix and the continued reduction in fees industry-wide; and poor increase in distribution and shareholder service charges ended in 21 percent rise in the company’s top-line versus second-quarter a year ago.
Revenue rise of 22 percent in first half is working above our target of 15 percent to 20 percent rate, although provided tough hurdles the management handles in the second half of FY14, we believe to remain cautious to remain with our prior estimation. Taking into consideration of profits, company’s 30.4 percent operating margins during the first half of the year were fundamentally in-line with our expectations, we expect operating margins to top 30 percent during 2014 irrespective of poor top-line results to some extent in the second half of the year.