Volatility And Little Upside For Janus, T. Rowe

Includes: JNS, TROW
by: Takeover Analyst

Janus Capital Group (NYSE:JNS) and T-Rowe Price (NASDAQ:TROW) are two investment advisory firms with completely different track records in mutual performance. While the former has experienced declines in AUM and weak investment results, the latter has had few redemptions and top investment results. Over the last twelve months, Janus has lost more than half of its value, as T-Rowe Price lost only 14.7%. The Street rates both companies around a "hold" due mostly to uncertainty in capital markets and a lack of hedging.

From a multiples perspective, Janus is the cheaper of the two. It trades at a respective 6.2x and 9.7x past and forward earnings while offering a dividend yield of 3.5%. T. Rowe Price, on the other hand, trades at a respective 18.5x and 17.5x past and forward earnings while offering a dividend yield of 2.3%. Given the volatility of both companies (as indicated by their high betas) and sovereign debt issues, I recommend holding out for now.

To make matters worse, at the third quarter earnings call, Janus' CEO, Dick Weil, noted floundering fundamentals.

In the third quarter of 2011, EPS was $0.15 compared to a $0.18 in the third quarter and $0.23 in the second quarter. Third quarter EPS included importantly $0.06 per share of investment losses, nonoperating investment losses, primarily related to awards of mutual funds we make to our employees as part of their LTI compensation packages…

Assets under management at September 30 were $141 billion, a decline of 17% versus June 30. Most of that, substantial -- the vast majority of that was a $26.5 billion negative market impact.

Particularly concerning for investors is that Janus Capital is quickly gaining the reputation for mutual fund underperformance. Management has claimed that past disappointing returns were due to portfolios being weighted more towards large-cap companies, but clients are seeming to not accept the excuse, as was revealed by the 17% decline in AUM.

Fourth quarter outflows are anticipated to be around $1B due to soft growth products. Perhaps most embarrassing is that the company is no longer part of the S&P 500 due to its lower market capitalization. Rocky capital markets are also something of a double whammy: it will limit the company's ability to repurchase shares and add risk, which will in turn incentivize selling. Even still, I am optimistic about the company's new CFO, who was previously the CEO of Oppenheimer Capital and thus has meaningful experience to add to the team. Keep in mind though that intellectual capital is not a panacea and, as Jim Cramer likes to say, the experts are not always right. Blind faith may lift shares in the near-term, but long-term value creation is driven ultimately by fundamentals.

Consensus estimates for Janus' EPS are that it will decline by 14.8% to $0.75 in 2011, decline by 20% in 2012, and then turnaround to grow by 21.7% in 2013. Assuming a multiple of 9.5x - at the far low-end of peers - and a conservative 2012 EPS of $0.57, the stock is fairly valued.

T. Rowe Price is in a more favorable position and is slightly preferred on the Street. Management remains focused on the longer-term and is recruiting more to attract clients. Quarterly outflows have been minimal with redemptions occurring in only three quarters over the last twelve years. Top decile investment performance is anticipated while buyback activity indicates solid liquidity. In addition, the retirement business has helped to offset slow top-line growth elsewhere.

Consensus estimates for the firm's EPS are that it will grow by 13.8% to $2.88 in 2011 and then by 6.6% and 13.7% more in the following two yeas. Assuming a multiple of 17.5x and a conservative 2012 EPS of $3.03, the firm is fairly valued. If the multiple falls more in line with peers at 15x and 2012 EPS turns out to be just 3.3% below the consensus, the stock would fall by 17%. Accordingly, investors are advised to hold out as macro headwinds dissipate.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.