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Federated Hermes Earnings: Higher Operating Expenses Offset Increased Money Market Fees

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Securities In This Article
Federated Hermes Inc Class B
(FHI)

There was little in no-moat-rated Federated Hermes’ FHI second-quarter results that would alter our long-term view of the firm. We expect to leave our $40 per share fair value estimate in place. We view the company’s shares as being slightly undervalued right now.

Federated reported solid first-quarter earnings per share of $0.81 on an adjusted basis, short of the FactSet consensus (and our own) estimate of $0.82. The majority of the shortfall was driven by higher operating expenses than we were forecasting for the period.

Federated closed out the June quarter with $704.0 billion in assets under management, or AUM, up 0.4% sequentially and 11.4% year over year. Net long-term outflows of $1.1 billion during the quarter resumed a string of outflows that started during the fourth quarter of 2021, with positive flows of $200 million during the first quarter being more reflective of the seasonality of flows in the industry. Making matters worse, Federated reported only $3.2 billion in inflows for its money market operations during the June quarter.

While average long-term AUM was down 2.6% year over year during the second quarter, Federated reported an 18.4% increase in revenue when compared with the prior year’s period, primarily due to the recovery in management fees for money market funds (which stand at 15 basis points right now) as interest rates have risen during the past year and eliminated the need for fee waivers on certain funds. The company’s first-half top-line gain of 18.0% was better than our forecast for 10%-15% revenue growth, but we expect results to taper off in the back half of the year.

As for profitability, adjusted GAAP operating margins of 22.5% during the first half were 300 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 22.3% year over year, primarily due to increased compensation and distribution expenses.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Greggory Warren

Strategist
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Greggory Warren, CFA, is a strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers the traditional U.S.-and Canadian-based asset managers, as well as Berkshire Hathaway.

Before assuming his current role in 2017, Warren covered the financial-services sector as a senior analyst since late 2008. Prior to that time, he covered non-alcoholic beverage manufacturers and distributors, packaged food firms, food service distributors, and tobacco companies. Before joining Morningstar in 2005, Warren worked as a buy-side equity analyst for more than seven years, covering consumer staples and consumer cyclicals.

Warren holds a bachelor's degree in accounting and English from Augustana College. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Society of Chicago. During 2014-19, Warren was selected to participate on the analyst panel at Berkshire Hathaway’s annual meeting, asking questions directly of Warren Buffett and Charlie Munger. The analyst panel was disbanded ahead of Berkshire’s 2020 annual meeting. Warren also ranked second in the investment services industry in The Wall Street Journal’s annual “Best on the Street” analysts survey in 2013, the last year the survey was conducted.

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