Will WisdomTree Investments (WETF) Miss on Q3 Earnings? - Analyst Blog

New York-based exchange-traded product (‘ETP') sponsor and asset manager WisdomTree Investments, Inc. (WETF) is scheduled to report its third-quarter 2014 results on Oct 31, before the opening bell.

The company reported earnings of 8 cents per share in the second-quarter, in line with the Zacks Consensus Estimate. Results reflected lower expenses and top-line growth aided by higher advisory fees. Further, the quarter witnessed increase in assets under management (AUM) that came on the back of continued inflows in European-focused equity ETFs, inflows in India ETF and inflows in U.S. equities, partially offset by outflows in Japan equities.

Will WisdomTree disappoint this earnings season? Let's see how things have shaped up.

Factors to Influence Q3 Results

On Apr 15, 2014, WisdomTree completed the acquisition of a U.K. and Jersey based ETP sponsor – Boost – which is currently known as WisdomTree Europe. The move came as part of the company's strategy to expand its global footprint.

At present, WisdomTree has 75% ownership of WisdomTree Europe. The remaining ownership interest will be acquired by the company at the end of four years since the acquisition. 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 will incur a charge. Such charges commenced in second-quarter 2014 and will be incurred in the subsequent quarters for the next four years.  We believe this charge will somewhat impact the third-quarter earnings.

Management on its second-quarter 2014 earnings conference call mentioned that it expects the business in Europe to generate a pre-tax total loss of $4.6 million in 2014 and $69 million in 2015.

On the expense front, management expects compensation cost to be in the range of 20– 23% of revenues for full-year 2014.

Management also shed light on its strategic growth initiatives. It expects to spend $69 million on strategic growth initiatives in 2014. These investments will stem from increased headcounts primarily in revenue generating areas of the company. The company expects increased spending in the second half of the year and projects such spending to be in the mid to low end of the $69 million range for the year.

Also, the company plans to launch around 10 to15 new ETFs this year.

On the income tax front, WisdomTree began to record GAAP tax expense beginning in the second-quarter 2014 at a rate of 45% in its U.S. business as a result of recording deferred tax asset in first quarter 2014. However, the company does not expect to make payment of cash income taxes in 2014 and for some time following the year end owing to the net operating losses attributable to excess stock option and restricted stock deductions.

The company cannot offset any taxes for the losses generated by the European business. Hence the effective tax rate is expected to remain high on a consolidated basis until the European business generates profits.

Apart from acquisition related charges, we observed a number of factors that can bear an impact on the upcoming results. We believe the upcoming release will exhibit some progress towards its strategic initiatives and also reflect its move towards the guidance.

Activities of WisdomTree during the quarter were inadequate to win analysts' confidence. As a result, the Zacks Consensus Estimate for the quarter remained stable at 9 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 9 cents per share.

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

Stocks That Warrant a Look

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

GAIN Capital Holdings, Inc. (GCAP) has an Earnings ESP of +125.00% and a Zacks Rank #2. It is expected to report results on Oct 30.

First Bancshares Inc. (FBMS) has an Earnings ESP of +21.74% and a Zacks Rank #3. It is expected to report results on Oct 30.

Nationstar Mortgage Holdings Inc. (NSM) has an Earnings ESP of +3.81% and a Zacks Rank #3. It is scheduled to report results on Nov 6.