Federated Hermes Earnings: Increased Money Market Assets and Fees Offset Weak Long-Term AUM Results
There was little in no-moat-rated Federated Hermes FHI first-quarter results that would alter our long-term view of the firm. We are leaving our $40 per share fair value estimate in place. We view the company’s shares as being only slightly undervalued right now.
Federated Hermes reported solid first-quarter earnings per share of $0.78 on an adjusted basis, beating the FactSet consensus of $0.73 and our own estimate of $0.71. The majority of the outperformance was driven by higher levels of assets under management, or AUM, higher management fees, and better cost controls than we had projected. The company closed out the March quarter with $701.0 billion in managed assets, up 4.8% sequentially and 11.1% year over year. Net long-term inflows of $196 million during the fourth quarter were, however, worse than our expectations for $3.6 billion in inflows. Federated Hermes more than made up for this, though, with $29.0 billion in inflows into its money market funds.
While average long-term AUM was down 8.3% year over year during the first quarter, Federated Hermes reported a 17.7% increase in revenue when compared with the prior year’s period, primarily due to the recovery in management fees for money market funds (which went from 8 basis points to 15 basis points year over year) as interest rates rose during the past year and eliminated the need for fee waivers on certain funds.
As for profitability, adjusted GAAP operating margins of 22.3% during the first quarter were 350 basis points lower than 2022 levels, but within our range of expectations for Federated Hermes to produce adjusted GAAP operating margins of 22%-23% this year. Operating expenses increased 23.3% last year, primarily due to increased distribution expenses, offset some by the mix shifts towards more money market fund assets. We expect to see both top- and bottom-line results improve as we move through the year, given the contribution coming from higher fees on money market funds.
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