Virtus Has 'Challenging' Quarter And Outlook, BofA Says

In a report published Tuesday, BofA Merrill Lynch analysts maintained a Neutral rating on

, while reducing the price objective from $140 to $128, following the company's release of disappointing quarterly results and muted outlook. Virtus reported its adjusted EPS at $2.22, missing the Street and BofA estimates. The miss was driven by higher costs. The company faced a "challenging" quarter, with outflows of $2.2B, margin pressure and a regulatory reserve. Moreover, the quarter marked the termination of the sub-advisory relationship with F-Squared. This was replaced by a technical analysis agreement with

, and the funds were renamed as Virtus Trend Funds. In the report BofA Merrill Lynch noted, "We expect lower revenues in 2Q given AUM down 3% q/q (2% below the 1Q average) and ongoing outflows, partially offset by an additional day. Though mgmt. noted improved flows in April (aided by a platform EM re-weight), we expect further outflows from the prior AlphaSector funds (renamed Virtus Trend Funds)." The analysts further commented, "With DWA as a service provider (not sub-advisor), we expect the fee rate to rise a bit, despite fee rate cuts of 10 bps on three funds. We expect expenses to seasonally moderate (comp), though we expect the DWA fee to provide some offset and the transition to generate extra expenses in 2Q, weighing on the margin." The analysts expect the company to continue to repurchase shares and offer dividend, in view of its healthy cash level and "clean" balance sheet. Moreover, an eventual SEC settlement appears to be "manageable."