Credit Suisse Cuts Waddell & Reed To Underperform Amid Weak Fund Performance

• The share price of Waddell & Reed Financial, Inc. WDR declined 42.03 percent through 2015, touching a low of $28.30 on December 18.
• Craig Siegenthaler of Credit Suisse has downgraded the rating on the company from Neutral to Underperform, while lowering the price target from $28 to $33.
• Siegenthaler expects the stock to lag its peers in 2016, given the company’s weak overall performance, weak cash flows and future risk to its traditional/retail focused business, associated with the DOL’s Fiduciary Standard Rule.

Analyst Craig Seigenthaler believes that the stock continues to be expensive, given the expectations of 8 percent downside risk to the sellside EPS estimates for 2017 and below peer organic growth in 2016.

Waddell & Reed Financial’s overall performance has been weak, with only 13 percent of the company’s rated AUM being rated 4 or 5 stars by Morningstar, representing a decline of 700 bps year on year, and below the peer group average of 32.5 percent.

According to the Credit Suisse report, “WDR's flagship Asset Strategy Fund has underperformed its peer group in both 2015 and 2014, and also posted mid-single digit negative returns in both years.”

Siegenthaler believes that the incremental margins, obtained through management fees in the Asset Strategy Fund, are meaningfully higher than the company’s blended margin of 27 percent. Therefore, outflows are expected to pressure the blended margin and have a larger impact on the EPS.