As a Foolish investor, you probably recognize the wisdom of making your decisions by analyzing a stock's fundamentals and ignoring the noise that determines the market's short-term movements. But what if you're looking at the stock of an asset manager? Can you evaluate a firm's prospects without trying to make some forecasts about the unpredictable movements of the broader market? It would seem that maintaining a view on the short-term direction of the securities markets would be a critically important factor in evaluating the earnings potential of most asset managers, because they generally derive their fee income from the value of the assets they manage.
But Federated Investors
Second, Federated is unlikely to undertake a radical acquisition that might destroy shareholder value. A larger scale can give asset managers better operating efficiency and improved distribution, and that dynamic inspired a number of recent combinations of large fund groups. Among the most prominent deals have been BlackRock's
With a market capitalization of $3.5 billion and a price-earnings multiple of just 18, Federated lacks the currency of a rich stock to initiate a similar transaction. More likely, the firm will continue to nibble at more modest deals, such as recent acquisitions of small, privately owned equity managers that have helped increase assets under management and incrementally diversified Federated's product offerings. This strategy of selectively adding small equity managers, which tend to earn higher fees than managers of fixed-income products, has helped Federated steadily improve its profit margins without altering its basic character as a manager of money market funds. Of the $222 billion of assets under management at Federated, more than 70% is invested in money market products.
Federated shares have declined by about 10% year to date, and the stock has underperformed its peer group over the past several years. While that history may position the company to deliver better returns in 2007, investors should consider recent news that might cast a shadow on Federated's prospects. The SEC announced an expanding investigation into whether firms that perform administration services for certain mutual funds have been paying undisclosed kickbacks to the funds' investment advisers. The investigation follows a settlement that the SEC reached with fund administrator BISYS
Many analysts place Federated's name on the list of promising candidates for a management-led buyout. While it's impossible to predict such an event, the possibility would help support a largely positive outlook for Federated shares in the year ahead.
Check out the other companies featured in "The Motley Fool's 2006 in Review and 2007 Preview" special.
Federated and Legg Mason are both Inside Value recommendations. Learn more about finding undervalued stocks from analyst Philip Durell.
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