Federated Hermes Earnings: Better Near-Term Results Distract From a More Difficult Future
While there was little in no-moat-rated Federated Hermes FHI third-quarter results that would alter our long-term view of the firm, we expect to lower our $38 per share fair value estimate 5%-10% to account for the impact that continued equity and credit market headwinds will have on results in both the near and long term.
Federated reported better than expected third-quarter earnings per share of $0.86 on an adjusted basis, better than the FactSet consensus estimate of $0.83 and our own estimate of $0.85. Most of the difference was driven by slightly higher revenue and slightly lower expenses than we were forecasting for the period.
Federated closed out the September quarter with $715.2 billion in assets under management, up 1.6% sequentially and 14.5% year over year. Net long-term inflows of $432 million during the quarter broke a fairly steady string of outflows that started during the fourth quarter of 2021, with positive flows of $200 million during the first quarter of 2023 being more reflective of the seasonality of flows in the industry. Federated also reported $16.1 billion in inflows for its money market operations.
While average long-term AUM was up 1.0% year over year during the third quarter, Federated reported a 5.6% increase in revenue as fee rates for long-term AUM improved, even as the company’s realization rate for its money market funds declined during the quarter. Year-to-date top-line growth of 13.6% was slightly better than our forecast for 10%-14% revenue growth, but we expect results to taper off some during the fourth quarter.
As for profitability, adjusted GAAP operating margins of 23.4% during the first three quarters of 2023 were lower than 2022 levels, but within our range of expectations for Federated Hermes to produce adjusted GAAP operating margins of 22%-24% this year. Operating expenses increased 5.9% year over year, primarily because of increased compensation costs.
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