Friday, FBR Capital Markets downgraded Federated Investors, Inc. (FII) shares to Underperform from Market Perform with a price target of $23. The brokerage raised its 2010 EPS estimate to $2.24 from $2.03, while establishing its 2011 estimate of $2.33.
Analyst Matt Snowling attributed the downgrade based on lack of growth prospects. The analyst believes Federated's asset growth and earnings prospects are less attractive than peers heading into 2010 and 2011. Risk of outflows from money market funds and what the analyst believes to be a lack of traction in its equities business should mean the company will underperform.
Futhermore, management's decision to pay a $150 million special dividend will require the company to take on more debt, a decision that the analyst believes is unnecessarily risky and precludes the company from making a meaningful acquisition to better diversify its asset mix. The analyst is at a loss as to why management decided to pay out a special dividend of $150 million when it has just $123 million of cash and securities.
The analyst said that this decision would likely mean the company will have to add to its at least $105 million of debt outstanding. Considering the fragile recovery in the markets and the vulnerability of the money market mutual fund business to outflows and/or regulatory changes, the analyst thinks this decision is unnecessarily risky. The analyst raised 2010 EPS estimate to reflect the lower run-rate for expenses.
Currently, FII is down $0.64 or 2.46% and trading at $25.38.
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