Franklin's Ratings Affirmed By Moody's, Outlook Negative
Zacks Investment Research | Jun 12, 2017 10:17PM ET
Moody's Investors Service, a rating arm of Moody's Corporation (NYSE:MCO) , affirmed the ratings of Franklin Resources, Inc. ( (NYSE:BEN) ). It revised the company’s rating outlook for senior unsecured debt from stable to negative, but affirmed the current rating at A1. The short-term rating remains P-1.
Looking at Franklin’s price performance, the stock has gained 11.7% over the last six months, outperforming the Financial – Investment Management industry’s rally of 8.2%. Will the negative rating outlook impact its performance going forward?
The estimate revisions trend witnessed so far doesn’t indicate any hindrance.The company has witnessed 5.9% upward revision in the Zacks Consensus Estimate for the current year earnings, in the last 60 days. As a result, the stock carries a Zacks Rank #2 (Buy).
Reasons Behind the Affirmation
Decline in assets under management (AUM) and revenues have weakened the company’s profile. Further, Moody’s believe that the competitive position of Franklin has declined to moderate due to volatility in performance of key products, the challenge of rising market share of passive products and changes to the distributors on whom the company relies to sell its funds.
Though the company has taken initiatives to improve performance, the rating outlook of the company shall remain negative until there is some confidence about Franklin’s organic growth of AUM. Moreover, changes in the regulations are likely to reduce the company’s ability to persuade its intermediaries to promote sales of its products.
Franklin’s low leverage and high cash coverage of debt support its A1 rating. Also, per Moody’s, the company’s leverage of 0.7 times EBITDA and tax–effected cash position of four times its debt enable it to invest in performance improvement initiatives and new products.
What Could Make Moody's Change the Ratings?
Ratings are expected to remain at the current level if the company experiences better investment performance, resumes positive net flows and revenue less distribution costs of $5 billion is achieved. Also, ratings will remain unchanged if positive trend in revenues and margins is restored.
However, ratings can be lowered if Franklin fails to improve performance or the net flows remain low. Also, if revenue less distribution costs are below $4.5 billion and the revenues and margins remain under pressure, ratings can fall.
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Factors to Support the Stock’s Performance
Despite all the above concerns, Franklin’s involvement in strategic acquisitions has enabled it to provide world-class investment solutions to its clients. Also, its cost control measures have effectively reduced operating expenses in the last few years.
Further, the company’s steady capital deployment activities continue to boost shareholders’ confidence.
Other Stocks that Warrant a Look
First Connecticut Bancorp, Inc.’s (NASDAQ:FBNK) earnings estimates have been revised 24.3% upward for the current year, in the past 60 days. Also, its share price rallied 22.3%, over the last six months. It sports a Zacks Rank #1 (Strong Buy). You can see .
Lazard Ltd. (NYSE:LAZ) witnessed an upward earnings estimate revision of 3.3% for the current year, in the past 60 days. Also, its share price is up 8.4%, over the last six months. It carries a Zacks Rank #2.
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