Federated Investors, Inc. (NYSE:FII)

CAPS Rating: 4 out of 5

The Company together with its consolidated subsidiaries is a provider of investment management products and related financial services.


Player Avatar WPThatcher (< 20) Submitted: 10/2/2010 11:44:39 AM : Underperform Start Price: $22.76 FII Score: -0.68

I recently read an interview with the CEO in the October '10 issue of Smart Money. I didn't like what I read, so I decided to dig deeper. Asset management is a great business with operating margins between 30-40%, tremendous economies of scale, and even provides a moat for the the really big firms like Fidelity, BLK, TROW. Plus, if you have a lot of institutional business, the assets can be very sticky. Added to this, if you are actually good at running the business, your asset base will grow because of market gains and the additional capital they attract. FII is a family business by a dad and his two sons essentially. Their core competency is running money market funds, but they've begun to expand into equity and fixed income. At first glance, this is a cheap company, cheaper than it's peers and cheaper than the levels it has traded in at for last ten years in terms of P/B, P/S, P/E, and P/CF. The company is treading water as far as assets under management (AUM) goes, but I actually liked that. When investing in asset managers it pays to be contrarian and investment when people are pulling money out because once they reverse, the stocks zoom. It also pays a nice dividend, in fact they just paid a really healthy special dividend ($1.26 cash) in the first quarter. So why am I giving it a red thumb? First of all, the money market fund business is currently not doing so well due to low yields. Secondly, they have a dual-class share structure, comprised of A and B shares. The Donahue family controls 100% of the A shares(those that have the voting rights) and 9% of the B shares. This dual class structure has been in place since the 1960 IPO. This is bad corporate governance 101. I'm not saying that these guys are bad, but it could possibly make them intractable. Also, I think it perversely incentivizes them to enrich themselves. This brings us back to the Q1 special dividend. It didn't go down very well with other shareholders. I can see why about 13% of the float is being shorted, up from 11.5% last month. This stock is a bad house in what is otherwise a very nice neighborhood.

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