Is Franklin Resources a Good Stock to Buy?

Franklin Resources, Inc. (NYSE:BEN) is a $26 billion market cap company which provides a variety of asset management services including mutual funds and hedge funds. Its operating revenues fell 4% in its most recent quarter, the third quarter of the company’s fiscal year ending in September, compared to the same period a year ago. Its two primary sources of revenue, investment management and sales and distribution, each experienced a decline in their business. This affected the bottom line as Franklin Resources had its net income decline by 10%. The first nine months of the year also show that the company has not sustained its business from last year: revenue is unchanged but earnings are slightly down, falling 5%. Assets under management at the end of June came in at $707 billion, which was 4% lower than the same point in 2011. Equities have seen declines in AUM, while managed capital in fixed-income has risen. Over the last year, the stock price has barely moved- it is up 3%- while the broader market indices have risen (the S&P 500, for example, is up 21% over the same time frame).

At its current stock price, Franklin Resources, Inc. trades at 14 times trailing earnings. With a fairly small dividend yield (0.9%), we think that it will have to turn around and start showing at least some growth in order to justify this stock price. Wall Street analysts expect it to do so, with consensus earnings estimates for next year implying a forward P/E of 13.

Ken Fisher FISHER ASSET MANAGEMENT

Some large funds increased their investments in Franklin Resources, Inc. last quarter, according to their 13F filings with the SEC. Billionaire Ken Fisher’s Fisher Asset Management owned 1.3 million shares at the end of June, a large increase from its position three months earlier (find more stocks that Fisher Asset Management has been buying). Southeastern Asset Management, a fund run by Mason Hawkins, owned a large stake in the company at the end of the first quarter and more than tripled it over the next three months. Southeastern’s 3.8 million shares made it the largest holder of Franklin Resources stock in our database of 13F filers (see more stock picks from Southeastern Asset Management). Renaissance Technologies, whose success made its founder Jim Simons a billionaire, initiated a position of about 110,000 shares during the second quarter.

Other large-cap publicly held asset management companies include T. Rowe Price Group, Inc. (NASDAQ:TROW), BlackRock, Inc. (NYSE:BLK), Ameriprise Financial, Inc. (NYSE:AMP), and Principal Financial Group Inc (NYSE:PFG). Their market capitalizations range from $8 billion to $31 billion, and so Franklin Resources is close to the higher end of the market. Of these four peers, T. Rowe Price is the odd one out from a valuation perspective: it trades at 21 times trailing earnings while the other three are clustered between P/E multiples of 13 and 14, in line with Franklin Resources’s own multiple. There is a bit more spread in terms of forward earnings multiples. As we’ve mentioned, Franklin Resources trades at 13 times forward estimates; this puts it higher than its peers except for T. Rowe Price’s 17. BlackRock’s forward P/E is 12, while Ameriprise’s and Principal’s are 9 and 8, respectively. Why is T. Rowe Price such an odd one out? Well, perhaps because the company actually grew its earnings last quarter (very slightly) compared to the same period in the previous year while the other three peers joined Franklin Resources in seeing their earnings decline at a double-digit percentage rate. Even if investors consider that important, T. Rowe Price seems a bit overvalued in the market at such high earnings multiples. The other four companies, including Franklin, appear about even in the market. Given this, we might go for the larger, and lower-valued compared to its forward earnings, BlackRock.