Credit Suisse Downgrades Franklin Resources To Underperform

• Shares of Franklin Resources, Inc. BEN have declined 33.65 percent through 2015, dropping close to their 52 week low on December 18, at $35.
• Craig Siegenthaler of Credit Suisse has downgraded the rating on the company from Neutral to Underperform, while lowering the price target from $41 to $37.
• Siegenthaler believes that the stock is expensive, given that 50 percent of the company’s free cash flow each quarter is stuck outside the U.S. and Franklin Resources might not repatriate it for over five years.

Analyst Craig Siegenthaler also expects the company’s FY2017 EPS to be adversely impacted by potentially large net outflows, as well as possible margin pressure. In addition, the stock appears to have 3 percent upside potential, as compared to the 10-15 percent upside for peers.

“Given low overall relative performance, weak flows, and future risk to BEN’s traditional/retail focused business from the DOL's Fiduciary Standard Rule (and a future SEC rule), we look for the BEN stock to lag peers in 2016,” Siegenthaler stated.

Franklin Resource’s overall fund performance has been weak, with only 17 percent of its rated AUM being rated with 4 or 5 stars by Morningstar, representing a 28 percent year on year decline and well below the peer group average of 31.5 percent.

The company Income and Global Bond funds together manage $230 billion. Siegenthaler estimates that these two mega funds contribute 40-50 percent of Franklin Resource’s total profits.

However, the Franklin Income Fund saw lower relative performance through 2015, while Global Bond has been impacted by negative absolute performance.

“We think these two category killers, which garnered significant retail AuM since the financial crisis,… could both see large net outflows in 2016/17, and re-emphasize BEN’s overall business concentration risk,” Siegenthaler added.