Fortress Investment Gains on Earnings Beat - Analyst Blog

Shares of investment manager Fortress Investment Group LLC FIG gained more than 1% after it reported first-quarter 2014 pre-tax distributable earnings of 21 cents per share on May 1. Results outpaced the Zacks Consensus Estimate of 18 cents and came in a penny ahead of the year-ago number.

With this, Fortress Investment delivered positive earnings surprises in 3 of the trailing 4 quarters with an average beat of 20%.

Results were primarily driven by increased revenues. A strong balance sheet position and improved management fee paying assets under management (AUM) were among the positives for the quarter. However, higher expenses were on the downside.

On a GAAP basis, net income came in at $6 million, significantly down from the prior-quarter net income of $67 million.

Business Highlights

Total revenue increased 27% year over year to $310 million in the reported quarter. The increase was primarily driven by the Media Business owing to the consolidation of New Media, partly offset by lower management fees from affiliates. It also surpassed the Zacks Consensus Estimate of $212 million.

Other income plummeted to $9 million from $70 million in the prior-year quarter. The slump in other income was primarily attributable to unrealized losses of $5 million, while the prior-year quarter reaped unrealized gains of $36 million. Also, lower earnings from equity method investees led to the decline.

Total expenses was up 39% year over year to $307 million. This was mainly due to allied expenses incurred in Media Business for the consolidation of New Media in Feb 2014. Also, the rise was due to increased costs related to compensation and benefits and general, administrative and other expenses.

As of Mar 31, 2014, management fee paying AUM increased 12% year over year to $62.5 billion. Notably, the Logan Circle division witnessed net client inflows of $0.5 billion.

As of Mar 31, 2014, total uncalled capital came in at $6.6 billion, which is available for common investment purposes.

Balance Sheet

As of Mar 31, 2014, cash and cash equivalents were $184.6 million, compared with $364.6 million as of Dec 31, 2013. Debt obligation stood at $125 million in the quarter. Notably, there was no debt obligation outstanding in the prior quarter.

Share Repurchase

The company repurchased around 60.6 million shares at a price of $6.00 per share, representing around 12% of total dividend-paying shares outstanding.

Our Viewpoint

We remain encouraged owing to the company's consistent organic growth. However, the rising expenses along with the macroeconomic headwinds across the industry remain concerns.

Performance of Other Investment Management Firms

Among other asset managers, Franklin Resources Inc.'s BEN March-quarter results missed the Zacks Consensus Estimate, while Affiliated Managers Group Inc. AMG and Ameriprise Financial, Inc. AMP outpaced the Zacks Consensus Estimate.