Creative Options Use Makes Federated Investors a Winning Play
September 11th, 2009
2 comments
Federated Investors [NYSE:FII] Sep. 11, 2009 - $25.78
52-week range: $15.80 (Dec. 29, 2008) - $36.63 (Sep. 19, 2008)
Dividend = $0.24 quarterly = 3.72% current yield
Federated provides investment-management services to institutions and individuals. The company offers 158 funds as well as management of separate accounts. Of the company’s managed funds, 50 are money market funds, 51 are fixed-income funds, and 57 are equity funds. Its money market and fixed-income funds represent about 87% and 6% of its managed assets respectively. Equity mutual funds were about 7% of assets with its largest equity fund, the Federated Kaufmann Fund, generating about 13% of Federated’s revenues in 2008.
Because Federated focuses on money market funds it fared better than most asset management companies in 2008’s bear market. Earnings per share actually hit a new record of $2.20 versus $2.12 before dipping a bit in 2009’s first half. Zacks sees EPS of $1.90 and $2.05 for 2009 and 2010 respectively. Those numbers are similar to expectations from Value Lineand other sources.
Federated is healthy. Standard and Poors and Value Line eachrate FII’s financial strength as ‘A’ and Value Line notes Federated’s ‘earnings predictability’ as being in the top 1% of all 1700 companies in their research universe.
Today’s well-covered dividend rate provides a very nice 3.72% current yield in a world where bank CDs and Treasury notes pay much lower rates. The payout has been increased in each of the past eleven years.
Here are the per share numbers from continuing operations as reported byValue Line:
[Dividend data excludes 2008’s special dividend of $2.76 /share]
|
Year
|
Sales
|
C/F
|
EPS
|
Div.
|
Avg. P/E
|
|
2002
|
6.32
|
1.98
|
1.74
|
0.22
|
17.3x
|
|
2003
|
7.58
|
2.07
|
1.83
|
0.30
|
15.0x
|
|
2004
|
7.92
|
2.03
|
1.77
|
0.41
|
17.0x
|
|
2005
|
8.49
|
2.08
|
1.84
|
0.58
|
17.0x
|
|
2006
|
9.42
|
2.07
|
1.80
|
0.69
|
19.3x
|
|
2007
|
11.08
|
2.39
|
2.12
|
0.81
|
17.8x
|
|
2008
|
11.97
|
2.41
|
2.20
|
0.9
|
14.8x
|
At today’s quote of $25.78 these shares are offered at 13.6x this year’s and 12.6x 2010 estimates. Those are the lowest valuations on FII shares since 1999. Buyers of Federated shares back then saw their investment rocket from a (split-adjusted) $10 /share to $32.80 within two years.
I think a return to at least a fifteen multiple is a good bet based on all historical precedents. That would put FII’s target price above $30 again. Is that a reasonable expectation? Sure. These shares peaked at $31.70 - $45.00 at some point during each calendar year from 2000 right through 2008. Sales and dividends are higher now than in all previous years and EPS are not far off their peak levels from past periods.
Morningstar sees ‘Fair Value’ as $30/share. Standard and Poors now carries a 12-month target of $29 /share.
Here’s my buy/write combination play with Federated to make an excellent total return with less risk than outright purchase of the shares.
Almost no industry group was slammed harder in the crash of 2008 – 2009 than the asset management companies. They suffered from both net asset withdrawals and huge mark-to-market reductions in the remaining assets under management [AUM] which slashed their earnings from record levels in 2007.
Federated Inv. [NYSE:FII] May 20, 2009: $22.19
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