Franklin Resources Earnings: Continued Equity and Credit Market Headwinds Offset Recent Results
While there was little in Franklin Resources’ BEN fiscal fourth-quarter results that would alter our long-term view of the narrow-moat firm, we expect to lower our $28 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. We view the shares as being modestly undervalued.
Franklin closed out the September quarter with $1.374 trillion in AUM, down 4.0% sequentially but up 5.9% year over year. Net long-term outflows of $6.9 billion during the firm’s fiscal fourth quarter were in line with our expectations. The company reported $21.3 billion in outflows for all of fiscal 2023, equivalent to a negative 1.7% rate of organic AUM growth.
This was on par with the negative 1.9% rate of organic AUM growth Franklin posted during fiscal 2022. During the past year, though, the company saw nearly identical outflows from its equity ($18.7 billion) and fixed-income ($16.2 billion) operations, while it generated positive flows with its multi-asset ($7.8 billion) and alternatives ($5.8 billion) platforms.
While average AUM was up 3.3% year over year during the company’s fiscal fourth quarter, Franklin reported a 4.0% increase in base management fee revenue as mix shift increased the firm’s realization rate to an estimated 41.9 basis points from 41.3 basis points in the year-ago period. Net revenue increased 2.4% year over year to $2.0 billion. On a full-year basis, Franklin’s top line declined 2.5%, better than our forecast for a 4% to 7% revenue decline for fiscal 2023.
As for profitability, full-year GAAP (and adjusted) operating margins of 14.0% (29.9%) were 640 (600) basis points lower year over year as negative operating leverage in the asset manager’s income statement was compounded by higher compensation costs, driven primarily by higher performance fee-related compensation, and slightly higher occupancy costs.
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