Citi Questions If Waddell & Reed Is 'Salvageable'; Maintains Sell

• Waddell & Reed Financial, Inc. WDR shares have declined 28.22 percent year to date, hitting a low of $33.77 on September 28.
• Citi’s William R Katz has maintained a Sell rating on the company, while lowering the price target from $32.50 to $29.00.
• Katz believes that although investors have been wondering whether the company is up for sale, the more relevant question is whether it is salvageable, “given acute performance issues and looming DoL risks.”

While the management has “adamantly refuted” all speculations regarding a sale of the company, Katz believes that even if Waddell & Reed Financial “can stem the flow bleeding, we suspect a much smaller WDR is likely, making it difficult for a strategic buyer to step in right now.”

Not only has the company’s Equity book been “struggling on an absolute basis,” Katz also mentioned the company relative performance has also been quite challenged.

According to the Citi report, “If the year ended now, the Asset Strategy fund, with $20.1B in AUM, would be down for the second consecutive year, a tough outcome, we believe for an absolute return oriented fund designed to collar upside/downside.”

Katz expects such a situation to lead to major attrition, especially given that Waddell & Reed Financial’s peers have been outperforming, while the company has also been underperforming the SPX.

Further run-off is expected in the company’s higher margin funds, which would increase pressure on margins. While the company’s balance sheet is strong, Katz believes that the shrinking AUM warrants corporate downsizing, instead of aggressive buybacks.