Why Is Waddell & Reed (WDR) Down 10.3% Since Last Earnings Report?

A month has gone by since the last earnings report for Waddell & Reed Financial (WDR). Shares have lost about 10.3% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Waddell & Reed due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Waddell & Reed Q1 Earnings Beat, AUM Down, Expenses Fall

Waddell & Reed Financial Inc’s first-quarter 2019 earnings of 42 cents per share outpaced the Zacks Consensus Estimate of 36 cents. However, the figure compared unfavorably with the year-ago quarter’s earnings of 56 cents.

Results benefited from decline in expenses. However, fall in AUM and lower revenues were the major headwinds. Further, all distribution channels witnessed outflows.

Net income attributable to Waddell & Reed totaled $32.1 million, down 31% from the prior-year quarter.

Revenues, Expenses & AUM Fall

Operating revenues declined 13% year over year to $259.4 million, reflecting lower investment management fees, underwriting and distribution fees, and shareholder service fees. Also, the figure missed the Zacks Consensus Estimate of $268.9 million.

Gross sales declined 34% year over year to $2.49 billion. Redemptions fell 18% to $4.29 billion. Net outflows were $1.80 billion, up 24%.

Operating expenses declined 6% year over year to $223.9 million. Almost all expense components, except for depreciation costs, witnessed a fall.

Operating margin was 13.7%, down from 20.1%.

As of Mar 31, 2019, AUM totaled $71.65 billion, down 11% year over year.

As of Mar 31, 2019, the company’s cash and cash equivalents, as well as investment securities totaled $826.7 million. Long-term debt was $94.9 million and stockholders’ equity was $868.6 million.

Quarterly Performance of Distribution Channels

At the Broker-Dealer channel, gross sales decreased 25% year over year to $754 million. Net outflows totaled $1.15 billion, down from $1.20 billion.

At the Unaffiliated channel, gross sales fell 29% year over year to $1.59 billion. Net outflows were $437 million, up from $200 million.

Gross sales at the Institutional channel were $141 million, plunging 74% from the year-ago quarter. The segment witnessed net outflows of $216 million, up from $52 million.

Share Repurchases

Waddell & Reed bought back 2.23 billion shares for $39.1 million during the reported quarter.

Outlook

Management expects to redeem $500 million of assets from its institutional fund in the first half of 2019.

Further, it revised the projections for operating expenses to $435 million in 2019, from $440 million. Depreciation costs are anticipated to be in the range of $15-$20 million for 2019, down from $25.7 million incurred in 2018.

The effective tax rate is expected to be 23-25%, going forward.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -9.7% due to these changes.

VGM Scores

At this time, Waddell & Reed has a poor Growth Score of F, however its Momentum Score is doing a lot better with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Waddell & Reed has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.

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