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.

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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."

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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

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