Despite its recent rise for the year, Janus Capital (NYSE:JNS) still receives an overall bearish rating on the Street. The investment services firm is rated closest to a "sell" - on par with the rating for Legg Mason (NYSE:LM) but below that for T. Rowe (NASDAQ:TROW). Based on my multiples analysis and DCF model, I find limited upside for all 3 firms at present time.
From a multiples perspective, T. Rowe is the most expensive of the three. It trades at a respective 20.2x and 16.3x past and forward earnings with a dividend yield of 2.1%. Janus and Legg Mason trade at a respective 10.6x and 18.1x forward earnings.
At the third quarter earnings call Janus' management noted strong management of operating expenses:
"Average AUM of $149.2 billion declined 4%. Revenue of $215 million declined 9% due to the decline in average AUM and an increase in negative performance fees.
Fourth quarter operating expenses were $145 million, which was $18 million or 11% lower than the prior quarter. Operating income of $70.6 million declined 5% quarter-over-quarter, as the 9% revenue decline was off by -- offset by an 11% decline in operating expenses. Operating margins for the quarter of 32.7%".
T. Rowe beat expectations with EPS at $0.73 (5.8% above consensus). Even still, the top-line fell 1% sequential and LT inflows grew organically by an annual rate of only 1%. This will cause investors to reevaluate T. Rowe's premium and inevitably put pressure on multiples. Institutional outflow during the same period declined 2% organically as clients de-risk. With capital expenditures of $300M in 2012, buyback activity is looking more like it will decline. On the other hand, the firm has a stellar brand, great scale, and is attractive in terms of stable revenues. Nearly nine out of ten funds have outperformed peers over a 5-year span.
Consensus estimates for T. Rowe's EPS forecast that it will grow by 7.5% to $3.14 in 2012 and then by 13.7% and 16% in the following two years. Modeling a CAGR of 12.3% for EPS over the next three years and then discounting backwards by a WACC of 9% yields a fair value figure of $52.57, implying 10.3% downside.
Janus, similarly, beat recent quarterly expectations. But even though fourth quarter EPS was 26.7% above consensus at $0.19, net flow activity at -$4B is significantly concerning. Outflows are accelerating and fund underperformance will represent a major headwind that, in my view, won't dissipate in time to reap rewards of a capital markets recovery. This will consequentially cause further performance fee losses.
Consensus estimates for Janus' EPS forecast that it will decline by 26.2% to $0.62 in 2012 and then grow by 17.7% and 19.2% in the following two years. Assuming a multiple of 13x and a conservative 2013 EPS of $0.69, the rough intrinsic value of the stock is $8.97, implying 8.3% upside.