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Franklin Resources Earnings: Continued Equity and Credit Market Headwinds Offset Recent Results

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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.

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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