I am invested in Franklin Resources more than half year now and so far each quarter I looked at financial results to see, whether business trends are in line with my expectations. So far I am very satisfied with share price performance as I bought shares in June 2016 @33.85. Since that time shares went up to around $40 + I received some dividends. Perfect. Is growth justified by fundamentals? How is business going?

First of all let’s have a look on basic indicators:

Market cap $22.5b

Net cash $8b (!)

Market cap cash adjusted $14.5b (this should be higher as tax on cash repatriated > 0%)

Almost whole growth in share price was due to tax issues on cash held overseas. Company has tones of cash and Trump promised to reduce tax on cash repatriated. Let’s assume tax is reduced by 20 percentage points -> up 1.6b to valuation, so around 10%.

Let’s look on business highlights:

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Situation is developing in the right direction. Look, $1.6b returned to shareholders, awesome, isn’t it? With $22.5b market cap it is more than 7%!

The problem are assets under management, which are declining:

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The main problem is that markets are very strong, so assets should come to Franklin Resources. When markets reverse and clients will panic, then outflows can be stronger. This is probably why investors are not willing to pay higher multiples for BEN. On the other hand, if outflows are mainly to ETFs, then maybe on declining markets Franklin will improve its’ assets under management performance?

It’s good to see EPS growing y/y, not much but growing. Keep in mind it is mainly due to buybacks. Net income as so is flat/declining.

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Let’s assume EPS = 2.67 (4-traders consensus, I would assume more like $2.9…)

P/E = 15

P/E when taking market cap cash adjusted = 9.65 (optimistic scenario).

 

Well, situation develops in line with my expectations. I am long BEN and I plan to keep it, till financial results and share price improve significantly. Maybe 2017 is a time for a special dividend? Who knows, last one was in December 2014, so some time ago…

 

Disclosure – long BEN