Why Is Waddell & Reed (WDR) Down 3.1% Since Last Earnings Report?

A month has gone by since the last earnings report for Waddell & Reed Financial (WDR). Shares have lost about 3.1% 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 its most recent earnings report in order to get a better handle on the important drivers.

Waddell & Reed Beats on Q3 Earnings, AUM Down

Waddell & Reed’s third-quarter 2019 earnings per share of 46 cents surpassed the Zacks Consensus Estimate of 40 cents. However, the bottom line declined 21% year over year.

Results were driven by a decline in expenses. However, fall in assets under management (AUM) and lower revenues were major headwinds. Further, all distribution channels witnessed outflows.

Net income attributable to Waddell & Reed totaled $33.1 million, down 29% from the prior-year quarter.

Revenues, Expenses & AUM Decline

Revenues declined 8% year over year to $270.7 million, reflecting lower investment management fees, underwriting and distribution fees, and shareholder service fees. However, the figure beat the Zacks Consensus Estimate of $266.8 million.

Gross sales declined 30% year over year to $1.8 billion. Redemptions were $4.5 billion, slightly down from $4.6 billion recorded in the prior-year quarter. Net outflows were $2.7 billion compared with $2 billion in the year-ago quarter.

Operating expenses declined 2% year over year to $230.7 million. Almost all expense components, except for distribution costs, compensation and benefits costs, and subadvisory fees, witnessed a fall.

Operating margin was 14.8%, down from 20.2%.

As of Sep 30, 2019, AUM totaled $68.8 billion, down 14% year over year.

As of Sep 30, 2019, the company’s cash and cash equivalents, and investment securities totaled $854.2 million. Long-term debt was $94.9 million and stockholders’ equity was $839.5 million.

Performance of Distribution Channels

At the Unaffiliated channel, gross sales fell 37% year over year to $999 million. Net outflows were $1.4 billion compared with $476 million recorded in the year-ago quarter.

Gross sales at the Institutional channel were $49 million, down 41% from the year-ago quarter. The segment witnessed net outflows of $181 million compared with net outflows of $452 million witnessed a year ago.

At the Wealth Management channel, gross sales declined 15% year over year to $744 million. Net outflows totaled $1.1 billion, up 3% year over year.

Share Repurchases

Waddell & Reed bought back 2.5 billion shares for $40.7 million during the reported quarter.

Outlook

The company expects controllable expenses (including restructuring charges related to the transfer agency outsourcing) to be nearly $106-$108 million in fourth-quarter 2019.

In relation to Waddell & Reed’s plans of outsourcing the transactional processing operations for its transfer agency, it is expected to record a pre-tax restructuring charge of $4-$6 million, which will be spread across the last two quarters of 2019.

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 an upward trend in estimates revision. The consensus estimate has shifted 5.78% due to these changes.

VGM Scores

Currently, Waddell & Reed has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

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

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. Notably, Waddell & Reed has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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