Wednesday, Credit Suisse downgraded Waddell & Reed Financial Inc. (WDR) shares to Neutral from Outperform, while increasing its price target to $17 from $14. The brokerage raised its first quarter EPS estimate to $0.20 from $0.18, its 2009 estimate to $0.98 from $0.85, and its 2010 estimate to $1.32 from $1.12.
Analyst Siegenthaler increased his estimates due to the positive absolute returns in WDR funds since he last updated estimates. Accordingly, the analyst raised his discounted cash flow-derived price target to $17, which is 17.3x his 2009 EPS estimate.
As the analyst's first quarter estimate is now in-line with the consensus and he is looking for flows of +$0.9 billion vs. -$1.8 billion in fourth quarter, this rating change is not a call on the quarter. Alternatively, the analyst is looking to take profits following the strong performance of the WDR stock and the WDR stock is trading at 19.5x his 2009 estimate, 21% above its 10-year mean.
The analyst views the multiple of both WDR and the asset manager industry as quite rich considering the current economic environment, and he believes valuations are embedding further equity market recovery.
The analyst said that WDR remains on track to hit its 20% operating margin objective by fourth quarter of 2009 (he forecasts a 20.2% margin in fourth quarter). WDR will likely try to manage expenses to conserve profitability for shareholders, and mid-March NAV improvement has also helped margins.
The analyst believes that many asset managers may essentially turn back the clocks on their business models, by consolidating like-products that may be unprofitable on a standalone basis. While WDR may not have to do this, the company may revisit its non-strategic sub-advisory relationships. Cost cutting over the past few quarters will allow for more operating leverage in an equity market recovery, by lowering the fixed cost base.
Currently, WDR is down $0.48 or 2.60% and trading at $18.00.
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