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Federated Hermes Earnings: Better Near-Term Results Distract From a More Difficult Future

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While there was little in no-moat-rated Federated Hermes FHI third-quarter results that would alter our long-term view of the firm, we expect to lower our $38 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.

Federated reported better than expected third-quarter earnings per share of $0.86 on an adjusted basis, better than the FactSet consensus estimate of $0.83 and our own estimate of $0.85. Most of the difference was driven by slightly higher revenue and slightly lower expenses than we were forecasting for the period.

Federated closed out the September quarter with $715.2 billion in assets under management, up 1.6% sequentially and 14.5% year over year. Net long-term inflows of $432 million during the quarter broke a fairly steady string of outflows that started during the fourth quarter of 2021, with positive flows of $200 million during the first quarter of 2023 being more reflective of the seasonality of flows in the industry. Federated also reported $16.1 billion in inflows for its money market operations.

While average long-term AUM was up 1.0% year over year during the third quarter, Federated reported a 5.6% increase in revenue as fee rates for long-term AUM improved, even as the company’s realization rate for its money market funds declined during the quarter. Year-to-date top-line growth of 13.6% was slightly better than our forecast for 10%-14% revenue growth, but we expect results to taper off some during the fourth quarter.

As for profitability, adjusted GAAP operating margins of 23.4% during the first three quarters of 2023 were lower than 2022 levels, but within our range of expectations for Federated Hermes to produce adjusted GAAP operating margins of 22%-24% this year. Operating expenses increased 5.9% year over year, primarily because of increased compensation costs.

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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