Franklin Is Right on the Money

Franklin Is Right on the Money

By LAWRENCE C. STRAUSS | MORE ARTICLES BY AUTHOR

Mutual-fund juggernaut Franklin Resources has recovered smartly from the dark days of 2008. Why the good times could continue for the company and its shares.

As family values go, frugality and prudence are high on the list, especially if the family manages other people's money. The Johnson family has long embraced these values in running Franklin Resources, and clients of the 65-year-old money-management firm have been the grateful beneficiaries.

Shareholders haven't done too poorly, either, except in the financial-crisis-ridden years of 2007 and '08, and this year they are sitting especially pretty. Shares (ticker: BEN) have surged 28%, to $123, and look set to keep rising, given a bullish backdrop for equities, the funds' strong performance, and the company's exposure to multiple asset classes and a global customer base. Some on Wall Street expect Franklin, based in San Mateo, Calif., to trade up to the mid-$140s in the next year, as the company builds out its diversified platform to power further earnings growth.

Franklin earned $1.9 billion, or $8.62 a share, in the fiscal year ended Sept. 30, on revenue of $7 billion, with most of its profit coming from management fees. Earnings were up 36% from fiscal 2010 as assets under management, or AUM, rose sharply. Earnings are expected to rise just 3% in the current fiscal year, to $8.87, but growth could accelerate in fiscal '13, leading to per-share profits of $9.80.

Enlarge Image

 

Jamie Tanaka

CEO Greg Johnson is a grandson of Franklin's founder.

Franklin trades for 14 times this fiscal year's earnings forecast, and 12.5 times next year's outlook, at the low end of the asset-management industry's range. Strip out the company's $4.9 billion of net cash, worth $18 a share, and the valuation is even more compelling.

As investors bailed out of the financial markets amid a historic credit crunch in 2008, Franklin's assets under management dived 22%, to $507 billion. But money has flowed in steadily since, with 44% of assets parked in fixed-income, 41% in equities and 14% in hybrid funds. "We love that they are one of the most diversified franchises," says John Miller, a portfolio manager at Ariel Capital Management, which owns the stock.

Asset diversity insulates Franklin somewhat when one asset class is out of favor, as equities were for much of last year. CEO Greg Johnson, a grandson of Franklin's founder, says the company is bullish on stocks, however. With yields so scarce, "we think equities are the right place to go," he says. "The risk-return is better for equities over the next decade."

Enlarge Image

 

None

Another of Franklin's attractions is the geographic diversity of its client base. About a third of assets are held by clients outside the U.S., so the company's fortunes don't hinge on business in just one region.

A strong global retail-distribution network also sets Franklin apart from peers. "Investors don't put as much of a premium on that as they ought to," says Marc Irizarry, an analyst at Goldman Sachs. Irizarry has a Buy rating on the stock, with a price target of $130.

The performance of Franklin's funds has been more than decent. Based on 10-year returns, the company finished first in Barron's latest fund-family ranking (see "Worth the Risk," Feb. 6), and funds such as Franklin Rising Dividends (FRDPX) and Franklin Federal Tax-Free Income (FKTIX) recently have been in the top quartile in their Morningstar categories.

Franklin's strong international flavor owes in part to its 1992 acquisition of Templeton, Galbraith & Hansberger, a pioneer in international investing, while its value-oriented offerings were bolstered by the 1996 offering of Mutual Series.

The Bottom Line

Franklin's shares could rally to the mid-$140s from a current $123, as managed assets grow.

Templeton Global Bond Fund (TPINX), the $61.6 billion flagship, has been a recent worry, as poor bets on foreign currencies triggered heavy outflows last year. But with the fund up 6.7% this year, and in the top 4% of its Morningstar category, flows appear to be stabilizing. 

THE JOHNSON FAMILY HAS ALWAYS played a central role at Franklin, and two sons of founder Rupert H. Johnson own a third of the shares, worth around $8 billion. The Johnsons have been good stewards of capital, allocating funds for smart acquisitions, stock buybacks and dividends. Franklin pays an annual dividend of $1.08 a share, and yields 0.9%. It also paid a special dividend of $2 a share in December, and has paid other "specials" in the past.

One potential threat to Franklin and other active money managers is the growing popularity of cheap exchange-traded funds, which control about $1.2 trillion of U.S.-based assets. Lacking the requisite scale, the company hasn't entered the ETF market. Then again, there might be no need to, so long as active management pays, and pays well. 

Nice Assets

Franklin's shares are inexpensive, relative to those of peers, and even cheaper if one excludes $18 a share of net cash on the company's balance sheet.

Company/Ticker	Recent  Price	12-Mo  Chg (%)	EPS  2012E	P/E  2012E	AUM  (bil)
BlackRock / BLK	$199.59	7.0%	$13.20	15.1	$3,500
Franklin Resources / BEN*	123.29	2.6	8.87	13.9	727
Invesco / IVZ	26.13	2.6	1.90	13.8	668
T. Rowe Price / TROW	64.10	-1.6	3.27	19.6	490
*Sept. fiscal year. E=Estimate. AUM=Assets under management.  Source: Bloomberg

E-mail: editors@barrons.com

 

Are The Bulls Rights?

CN: Are The Bulls Rights?

Bert Dohmen, Contributor

The bulls say that the setback in China's economy, and the 20% decline in its stock market over the past 12 months, is a buying opportunity.

The reasoning: China's government, which has been fighting inflation, will now be able to loosen credit and engineer the historic elusive goal of all central banks, namely the "soft landing."

Once again I diverge from my colleagues in the business and say that a China crisis is in the early stages and eventually may produce a tsunami throughout the financial markets. Even dictatorships cannot engineer "soft landings."

In the aftermath of the 2008-2009 crisis, the Bank of China created a stimulus about four times bigger than the one in the U.S., (as a percentage of GDP). It created a new credit and real estate bubble. It's economic fact that a credit bubble, once it bursts, cannot be reflated without causing a greater disaster down the road. Ludwig von Mises, founder of the Austrian School of Economics, wrote exactly that over 60 years ago.

Didn't China have a real estate bubble the past three years? Well, in 2011 the average condo in Beijing cost 57 years of medium per capita income. That is totally unaffordable. These condos were not built for inhabiting, but for speculating. Millions of them have never had their electric meter turned on. Many don't even have bathrooms. One report says there are 40 million empty apartments.

Do the bulls realize that the important Shanghai stock market index is down more than 30% from its post crisis rally high in 2009? That's during a time that the U.S. stock market had a good recovery and China's  government-created GDP growth numbers were at double-digit levels. If the China stock market was in a bear market during such allegedly strong growth, what will happen to it when growth declines substantially? Or perhaps such a GDP growth shrinkage won't be allowed, using creative accounting.

I am very skeptical about numbers coming out of China, whether it's from the government or individual companies. Look at the Chinese IPOs in the U.S. over the past years and the how many of these firms have actually disappeared.

As evidence to this, I quote an item from Bloomberg:

The China statistics bureau said local officials forced some hotels, coal miners and aluminum makers to report false numbers, highlighting flaws in data tracking the world's second-largest economy.

Statistics officials in Hejin City gave companies "seriously untrue" numbers to submit for 2011, the National Bureau of Statistics said on its Web site.

Yes, local governments pressured companies in their realm to produce false and overly positive numbers. There is the "smoking gun." But these are the numbers Wall Street analysts seem to believe.

I look at more important numbers than GDP:  manufacturing, steel consumption instead of production, electrical consumption, purchasing managers survey, actual inflation instead of that announced by the government, etc.

Manufacturing numbers have been contracting the past five months. That's recession. Car sales have stalled out, with luxury car makers like BMW and Mercedes offering unprecedented 25% discounts. Electrical consumption, the best indicator of economic activity, has been declining, not increasing.

Special Offer: Get 13 undervalued stocks from value expert John Buckingham in the Free Special Report 2012: Time For Value. Click here for instant access.

In 2007, when the optimism about Dubai hit its peak, I predicted that it would be the largest real estate debacle in history. The numbers just didn't add up. I predicted that many of the huge skyscrapers would remain virtually empty. Now we know that this was correct. The collapse of the China real estate bubble is much bigger. Prices of condos in the major cities are already down 50% or more. Sales have plunged by similar amounts. Major developers are in financial trouble. Doesn't  this sound like 2008 in the U.S.?

The bulls talk about the 8% GDP growth in China, which sounds strong compared to western economies. But this is a false number. Reported GDP growth is always after deducting inflation. So, if an artificially low inflation number is used, it increases the reported GDP. Actual inflation in China may be 50-100% higher than the official number. Thus, GDP growth may be from 0 to 4%.

Last year the global markets were focused on the European crisis that almost led to European banking crisis. The next several years which see something much bigger, and it will come out of Asia.

But well known Wall Street figures appear in the media and predict a "soft landing." Can they cite one case where the bursting of a huge credit bubble has had a soft landing? Perhaps communist governments are better at it, using creative accounting.

My dire outlook in 2007 and 2008, as I depicted in my 2007 book, Prelude To Meltdown, was opposed by the same Wall Street optimism. After all, everything was booming and the trajectories pointed upwards. And bullish analysts are good for business. "Things have never been better," the CEO of a major private equity firm told the audience of a very important conference in April 2007.

Sentiment about China last year was similar because GDP was growing at double-digit rates. When the majority of professionals all believe the same, they are likely to all be wrong.

For me, China is the big elephant to watch very closely. However, the government may be able to delay the most serious problems until next year.

For more information, click here and get my 100 page special report, The Coming China Crisis.

 

Qualcomm Inside

By MARK VEVERKA | MORE ARTICLES BY AUTHOR

The global market for smartphones is expected to double, to one billion per year, by 2015. Qualcomm's chips will power much of that growth.

 

Your smartphone probably has Qualcomm inside. And if it doesn't, it soon will.

Just as Intel (ticker: INTC) has been the dominant supplier of silicon chips for personal computers since the 1980s, Qualcomm (QCOM) has assumed that mantle in the burgeoning world of mobile computing and communications. The PC may not be dead, but increasingly smartphones and tablets are the new PC, and Qualcomm looks like the new Intel.

"We haven't built a consumer brand" like Intel, but "we've worked very hard to get in this position," Qualcomm Chief Executive Paul Jacobs told Barron's during an interview at the company's sprawling campus headquarters in San Diego.

But if Qualcomm isn't a household name, the companies it sells chips and licenses its technology to are, starting with Apple (AAPL). Though neither Qualcomm nor the notoriously secretive Apple will confirm that Qualcomm's technology is in the latest iPhones and iPads, tear-downs of the latest iPhone, and the iPad released on Friday, found the company's chipsets inside. Charter Equity Research telecom analyst Ed Snyder, says Apple selected Qualcomm over Intel's Infineon division as the supplier of its communications chips with the launch of the iPhone 4S in 2011.

Enlarge Image

 

 

Daniel Acker/Bloomberg News

CEO Paul Jacobs says mobile Internet "is the biggest trend in the world right now."

Jacobs, 49, who succeeded his father, Qualcomm founder Irwin Jacobs, as CEO in 2005, says the mobile Internet "is the biggest trend in the world right now." According to Gartner, the global market for smartphones is expected to double, to one billion, by 2015. And Qualcomm's position at the center of the market is due not least to decisions the company made over a decade ago about how they believed the technology would unfold.

Qualcomm's shares, which traded late last week at about $65, could rise 30% or more over the next year as smartphone demand grows.

SINCE THE EARLY 1990S, Qualcomm has invested tens of billion of dollars to establish a standard for mobile phone technology, garnering thousands of patents along the way. Today it makes communications chips or licenses the technology for virtually every 3G smartphone made in the world. Nokia, Samsung, Motorola and HTC, among others, pay Qualcomm a license fee of around $6 for every phone they sell. Apple's arrangement is more oblique but is no doubt quite lucrative.

Royalties accounted for 38% of Qualcomm's $15 billion in revenue in fiscal 2011, which ended in September, but generated roughly 80% of its $4.26 billion, or $3.20 a share in earnings―a 37% increase over 2010. This year earnings are expected to jump another 17%, to $3.75, on a 29% rise in revenue.

Enlarge Image

 

Qualcomm/QCOM
Recent Price	$65.21
52 Week Hi-Lo	$65.56 - $45.98
Market Val (bil)	$110.3
EPS 2011	$3.20
EPS 2012E	$3.75
P/E 2012E	17.4
E=Estimate; September fiscal year.
Source: Thomson Reuters

Qualcomm's so-called baseband digital signal-processing technology is vastly complex, and the company's huge stream of royalty payments has allowed it to build its patent wall ever higher, particularly when it comes to the new fourth-generation, high-speed mobile technology known as LTE.

While rivals, including Intel, fought hard for a techology called WiMax to become the 4G standard, Qualcomm focused on the more complex LTE. A vocal minority of tech executives in Silicon Valley were hoping that WiMax would prevail, freeing them of the need to pay royalties to Qualcomm.

Jacobs recalls that, as far back as the hey-day of the dot-com boom, he went to the Valley with his vision of cellphones that would shoot video and surf the Web. "They almost threw shoes at me," he recalls. The company pursued its next generation strategy nonetheless. Thanks to Apple, the mobile web developed faster than most expected, and the rapid adoption of smartphones by wireless carriers created a demand for Qualcomm's technologies geared at handling more data faster.

QUALCOMM ALSO SELLS connectivity chips, which provide the cellular, WiFi and Bluetooth technology, through its $3.1 billion Atheros acquisition in January 2011. And it makes and sells applications processors under the Snapdragon moniker that are the brains that drive video, photos and graphics. Bundled together these chip sets, which are already in high demand, will allow Microsoft's Windows 8 tablets and notebook computers to deploy touch-screen technology, when they go to market next year.

The Bottom Line

Qualcomm's communications chips and high patent walls make it a key player in mobile computing. Its shares could rise 30% or more.

Scott Chapman, portfolio manager for Lateef Investment Management, thinks that Qualcomm's low-power chipsets gives it a big advantage over Intel in Windows mobile operating systems. But even with no contribution from Windows 8, which is due late this year, he thinks the company could earn $6.4 billion, or $3.80 a share in 2012. Factoring in his $13.1 billion estimate for adjusted net cash on the balance sheet, he thinks the stock is worth $85. Snyder's target is $90.

At the shareholder meeting two weeks ago, CEO Jacobs announced a $4 billion stock buyback plan, which would reduce the share count by 4%; the company also raised the quarterly dividend 16%, for a yield of 1.5%.

The long-term knocks on the stock, which is up 19% this year, have mostly dissipated. Its per-unit licensing fee has been falling for years, but the number of devices it earns on is growing substantially faster than that, and fears that manufacturers would not re-up their licensing deals have been greatly reduced, mostly because Qualcomm's technology can no longer be avoided. 

 

Qualcomm Inside

By MARK VEVERKA | MORE ARTICLES BY AUTHOR

The global market for smartphones is expected to double, to one billion per year, by 2015. Qualcomm's chips will power much of that growth.

 

Your smartphone probably has Qualcomm inside. And if it doesn't, it soon will.

Just as Intel (ticker: INTC) has been the dominant supplier of silicon chips for personal computers since the 1980s, Qualcomm (QCOM) has assumed that mantle in the burgeoning world of mobile computing and communications. The PC may not be dead, but increasingly smartphones and tablets are the new PC, and Qualcomm looks like the new Intel.

"We haven't built a consumer brand" like Intel, but "we've worked very hard to get in this position," Qualcomm Chief Executive Paul Jacobs told Barron's during an interview at the company's sprawling campus headquarters in San Diego.

But if Qualcomm isn't a household name, the companies it sells chips and licenses its technology to are, starting with Apple (AAPL). Though neither Qualcomm nor the notoriously secretive Apple will confirm that Qualcomm's technology is in the latest iPhones and iPads, tear-downs of the latest iPhone, and the iPad released on Friday, found the company's chipsets inside. Charter Equity Research telecom analyst Ed Snyder, says Apple selected Qualcomm over Intel's Infineon division as the supplier of its communications chips with the launch of the iPhone 4S in 2011.

Enlarge Image

 

 

Daniel Acker/Bloomberg News

CEO Paul Jacobs says mobile Internet "is the biggest trend in the world right now."

Jacobs, 49, who succeeded his father, Qualcomm founder Irwin Jacobs, as CEO in 2005, says the mobile Internet "is the biggest trend in the world right now." According to Gartner, the global market for smartphones is expected to double, to one billion, by 2015. And Qualcomm's position at the center of the market is due not least to decisions the company made over a decade ago about how they believed the technology would unfold.

Qualcomm's shares, which traded late last week at about $65, could rise 30% or more over the next year as smartphone demand grows.

SINCE THE EARLY 1990S, Qualcomm has invested tens of billion of dollars to establish a standard for mobile phone technology, garnering thousands of patents along the way. Today it makes communications chips or licenses the technology for virtually every 3G smartphone made in the world. Nokia, Samsung, Motorola and HTC, among others, pay Qualcomm a license fee of around $6 for every phone they sell. Apple's arrangement is more oblique but is no doubt quite lucrative.

Royalties accounted for 38% of Qualcomm's $15 billion in revenue in fiscal 2011, which ended in September, but generated roughly 80% of its $4.26 billion, or $3.20 a share in earnings―a 37% increase over 2010. This year earnings are expected to jump another 17%, to $3.75, on a 29% rise in revenue.

Enlarge Image

 

Qualcomm/QCOM
Recent Price	$65.21
52 Week Hi-Lo	$65.56 - $45.98
Market Val (bil)	$110.3
EPS 2011	$3.20
EPS 2012E	$3.75
P/E 2012E	17.4
E=Estimate; September fiscal year.
Source: Thomson Reuters

Qualcomm's so-called baseband digital signal-processing technology is vastly complex, and the company's huge stream of royalty payments has allowed it to build its patent wall ever higher, particularly when it comes to the new fourth-generation, high-speed mobile technology known as LTE.

While rivals, including Intel, fought hard for a techology called WiMax to become the 4G standard, Qualcomm focused on the more complex LTE. A vocal minority of tech executives in Silicon Valley were hoping that WiMax would prevail, freeing them of the need to pay royalties to Qualcomm.

Jacobs recalls that, as far back as the hey-day of the dot-com boom, he went to the Valley with his vision of cellphones that would shoot video and surf the Web. "They almost threw shoes at me," he recalls. The company pursued its next generation strategy nonetheless. Thanks to Apple, the mobile web developed faster than most expected, and the rapid adoption of smartphones by wireless carriers created a demand for Qualcomm's technologies geared at handling more data faster.

QUALCOMM ALSO SELLS connectivity chips, which provide the cellular, WiFi and Bluetooth technology, through its $3.1 billion Atheros acquisition in January 2011. And it makes and sells applications processors under the Snapdragon moniker that are the brains that drive video, photos and graphics. Bundled together these chip sets, which are already in high demand, will allow Microsoft's Windows 8 tablets and notebook computers to deploy touch-screen technology, when they go to market next year.

The Bottom Line

Qualcomm's communications chips and high patent walls make it a key player in mobile computing. Its shares could rise 30% or more.

Scott Chapman, portfolio manager for Lateef Investment Management, thinks that Qualcomm's low-power chipsets gives it a big advantage over Intel in Windows mobile operating systems. But even with no contribution from Windows 8, which is due late this year, he thinks the company could earn $6.4 billion, or $3.80 a share in 2012. Factoring in his $13.1 billion estimate for adjusted net cash on the balance sheet, he thinks the stock is worth $85. Snyder's target is $90.

At the shareholder meeting two weeks ago, CEO Jacobs announced a $4 billion stock buyback plan, which would reduce the share count by 4%; the company also raised the quarterly dividend 16%, for a yield of 1.5%.

The long-term knocks on the stock, which is up 19% this year, have mostly dissipated. Its per-unit licensing fee has been falling for years, but the number of devices it earns on is growing substantially faster than that, and fears that manufacturers would not re-up their licensing deals have been greatly reduced, mostly because Qualcomm's technology can no longer be avoided.