Will Cost Pressure Hurt WisdomTree (WETF) Q4 Earnings?

WisdomTree Investments, Inc. WETF is scheduled to report fourth-quarter and full-year 2015 results on Feb 5.

Last quarter, this New York-based exchange traded fund ("ETF") and exchange-traded product ("ETP") sponsor and asset manager reported earnings per share of 17 cents, significantly above the prior-year quarter earnings of 8 cents per share. Notably, the figure came in line with the Zacks Consensus Estimate. Results were primarily aided by robust revenue growth, partially offset by higher expenses. Also, the company recorded significant growth in U.S. listed ETF assets under management (AUM) and European listed AUM.  

Will WisdomTree be able to deliver improved earnings this quarter as well? Let's see how things have shaped up.

Factors to Influence Q4 Results

During the quarter, WisdomTree remained focused on executing its strategic growth initiatives including expansion of distribution capabilities, investment in technology, launch of innovative products and addition of personnel.

Given such initiatives, we expect marketing and sales expenses to trend higher in the fourth quarter. Also, compensation and benefits expense should exhibit a rise, reflecting increased headcount.

Management earlier expected to spend $12 million to $16 million in 2015 on its strategic moves. However, the company spent around $8 million till the end of third quarter 2015 and expects the overall spending to be at the lower end or may even trend below the full-year guidance. Regarding U.S. compensation cost, management anticipates to be at the high end of the range of 21% – 25% of revenues for full-year 2015.

During the third quarter conference call, Wisdom Tree had also shed light regarding its April 2014 acquisition of the U.K. and Jersey based ETP sponsor – Boost – in which WisdomTree has 75% ownership. As per the deal, the remaining ownership interest will be acquired by the company at the end of 2017. While there was no consideration transferred on the acquisition date, the final payment will be made in cash over a period of two years. In order to reflect the fair value of this buyout liability, the company started incurring charges each quarter that commenced in second-quarter 2014. In this context, Wisdom Tree noted that it has updated the fair value method, which will result in recording a non-cash charge of $1 million to $2 million in the fourth quarter 2015 and subsequent quarters.

We do not expect the company to post impressive growth in AUM for the fourth quarter, which witnessed several headwinds including the China turmoil. Therefore, taking the market performance in its stride, overall AUM is expected to trend down or remain stable for WisdomTree.

Notably, WisdiomTree, which was enjoying its leadership in the currency hedging strategies through two products – WisdomTree Europe Hedged Equity Fund HEDJ and WisdomTree Japan Hedged Equity Fund DXJ – in the first half, perhaps has lost momentum in the fourth quarter owing to heightened volatility in the global stock market.

Nevertheless, the company is likely to show its continued success in the short and leverage ETPs through its Boost ETP product.

Also, WisdiomTree's activities during the quarter were adequate to win analysts' confidence. As a result, the Zacks Consensus Estimate for the quarter moved up 7.1% to 15 cents per share over the last 7 days.

Earnings Whispers

Our proven model does not conclusively show that WisdomTree is likely to beat the Zacks Consensus Estimate in the upcoming release. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least #2 (Buy) or #3 (Hold) for this to happen. Unfortunately, this is not the case here as elaborated below.

Zacks ESP: The Earnings ESP for WisdomTree is 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate stand at 15 cents per share.

Zacks Rank: WisdomTree's Zacks Rank #4 (Sell) further lowers the predictive power of ESP. We caution investors against stocks with a Zacks Rank #4 and #5 (Sell-rated stocks) going into the earnings announcement

Stocks That Warrant a Look

Here are some stocks you may want to consider, as our model shows that these also have the right combination of elements to post an earnings beat this quarter:

CNO Financial Group, Inc. CNO has an Earnings ESP of +2.70% and carries a Zacks Rank #3. It is expected to report results on Feb 9.

Earnings ESP for American Capital, Ltd. ACAS is +12.50% and it has a Zacks Rank #1. The company is slated to report on Feb 23.

TCP Capital Corp. TCPC has an Earnings ESP of +2.44% and a Zacks Rank #3. It is scheduled to report results on Feb 29.

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