Waddell & Reed Beats by a Penny - Analyst Blog

Waddell & Reed Financial, Inc.’s (WDR) fourth-quarter earnings of 39 cents per share were only a penny ahead of the Zacks Consensus Estimate. This compares favorably with a one-cent loss in the prior-year quarter. Results for the prior-year quarter included $18.2 million restructuring and impairment charges. Excluding these charges, earnings would have been 21 cents per share. 

Net income for the reported quarter came in at $33.3 million, compared to a net loss of $0.7 million in the prior-year quarter. 

Despite the sluggish economic environment, Waddell & Reed witnessed an improvement in its sales volume across all revenue channels. Results were also aided by higher net inflows, comparatively lower redemption levels, growth in assets under management and improvement in operating margin. Higher operating expenses were the downside. 

Estimate Revisions Trend
 
There were no estimate revisions in either direction over the last 7 days. Over the last 30 days, six of the 12 analysts covering the stock increased estimates for full year 2010, while no downward revisions were witnessed. Currently the Zacks Consensus Estimate for 2010 is a gain of $1.80, which would be a substantial improvement over the full-year 2009 earnings of $1.26 per share. In 2008, Waddell & Reed had earned $1.36 per share.
 
The absence of downward estimate revisions for 2010 indicates a likelihood of upward pressure on the performance of the stock in the upcoming quarters. As a result, the stock retains its Zacks # 2 Rank, which translates into a short-term 'Buy' rating. However, considering the current fundamentals of Waddell & Reed, we maintain a long-term “Neutral" recommendation on the stock. 

With respect to earnings surprises, the stock has provided positive surprises over the last four quarters. The four quarter average remained at 9%. This implies that Waddell & Reed has surpassed the Zacks Consensus Estimate by 9% over the last four quarters. The current Zacks Consensus Estimates for the first quarter and full-year 2010 are earnings of 40 cents and $1.80, respectively. The upside potential of these estimates, essentially a proxy for future earnings surprises, currently stands at 5% and 3% for the first quarter and full-year 2010, respectively. 

Quarter in Detail 

Waddell & Reed’s operating revenues for the reported quarter increased 12.3% sequentially and 28.1% year-over-year to $244.8 million. Net operating margin dropped to 21.3% from 22.4% in the prior quarter but improved from 3.5% in the prior-year quarter. 

In the Advisors channel, revenue improved 13.8% sequentially to $60.5 million resulting from a combination of higher sales volume across front-load, variable annuity and insurance products, as well as higher asset-based services, distribution fees and asset allocation product fees. Direct expenses increased while indirect expenses declined. In the Wholesale channel, the 14.2% sequential improvement in revenue to $110.3 million was primarily attributable to higher asset-based services and distribution fees. Higher sales volume from Legend advisors also positively contributed to revenues. Increase in direct expenses was partly offset by lower wholesaler commissions. Indirect expenses were almost unchanged. 

Waddell & Reed’s operating expenses increased 13.9% sequentially and 4.6% year-over-year to $192.7 million. The sequential increase was primarily attributable to higher underwriting and distribution costs, sub-advisory fees and compensation costs. 

As of Dec 31, 2009, assets under management were $69.8 billion, compared to $64.5 billion at the end of the prior quarter and $47.5 billion at the end of the prior-year quarter. Net inflows were $2.7 billion, compared to net inflows of $2.4 billion in the prior quarter and net outflows of $2.0 billion in the prior-year quarter. Redemptions for the reported quarter increased 6.7% sequentially but decreased 37.2% year-over-year to $3.0 billion. 

Though we expect that Waddell & Reed will be able to maintain its strong growth with increasing assets under management as a result of solid investment and sales performance, operating margin compression as a result of growth in flows and significant intangibles on its balance sheet will drag profitability.
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