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Waddell & Reed Financial (WDR) |
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WIKI ANALYSIS
Relative to other asset management firms, Waddell is a small company. It competes against household financial services firms, whose assets under management often overshadow that of WDR's $65 billion. Moreover, Waddell has $200 million of debt, and with current credit conditions will be hard-pressed to refinance the loan. WDR competes with many firms throughout the financial services industry, but its closest competitors include Eaton Vance, Jefferies Group, and Legg Mason.
Corporate Overview
Waddell's revenue, AUM, and net income reached all-time highs in 2007. The widespread success was spearheaded by the 34+% increase in AUM to $65 billion[3] thanks to strong performances in all three distribution channels (Advisors, Wholesale, and Institutional).
2Q2008 saw WDR continuing to weather the greater financial industry slump. In fact, earnings per share grew by 27% over Q1 and 17% over a year ago.[4] Moreover , operating revenue grew by 8% while operating expenses increased by only 4%.[4] Most notably, the firm's sales in the Wholesale Distribution Channel (explained below) surged 169% over a year ago.[4] Finally, weighted average returns in the funds and managed accounts of Waddell outperformed the S&P index by more than 525 basis points during the second quarter of 2008 and over 700 basis points as of the year-to-date.[4] The above results can be attributed to increases in sales per advisor, net asset inflows, and strong investment positions.[4]
Business Segments
- Investment Management Fees (44% of Revenue) depend on the average value of the firm's assets under management. Such fees are calculated as a percentage of AUM.
- Underwriting and Distribution Fees (44% of Revenue) are based on commissions received on investment transactions and advisory services.
- Shareholder Service Fees (11% of Revenue) refer to portfolio accounting charges, custodian fees for retirement accounts, and other maintenance costs.
Distribution Channels
- Advisors Channel (53% of AUM; 24% of Channel Sales) WDR's Advisors Channel involves nearly 2,300 consultants[5] focused on providing financial advice to clients. Waddell mainly implements its own investment products for this goal. In fact, the Advisors segment gross sales revenue grew by 10% to an all-time high of $3.5 billion and sales per advisor hit a new high of $1.2 million.[5]
- Wholesale Channel (33% of AUM; 64% of Channel Sales) The company's Wholesale Channel accounts for the distribution of assets through brokers and dealers, investment advisors, and retirement platforms.[5] Wholesale assets doubled over 2007 to nearly $22 billion, thanks to weighting investments toward internally managed, profitable funds[6] and Waddell efforts to expand AUM distributed in this channel.[7] Moreover, market appreciation of nearly $4 billion and net sales of nearly $7 billion over 2007[8] both bolstered Wholesale growth.
- Institutional Channel (14% of AUM; 13% of Channel Sales) Waddell manages assets for a variety of clients within the Institutional Channel, including defined benefit pension plans, other investment firms (as a subadvisor), endowments, and other high net worth customers.[9]
In the longer run, WDR's revenue has grown every year since 2003, hitting an all-time high of over $837 million in 2007. But, Waddell's net income decreased consecutively in 2005 and 2006. However, 2007 saw WDR's net income re-establish the growing trend with an all-time high of $125.5 million. The consecutive slips in net income can be attributed to one-time regulatory and legal settlements. Waddell, as a holding company, is composed of several subsidiaries, through which they offer their services and earn revenue. The 2006 drop in net income occurred as a result of restructuring charges for Austin, Calvert & Flavin, Inc. (ACF), one of its subsidiaries.[10] The 2005 net income fall was also due to restructuring and severance charges, this time with the Advisors Channel as well as a separation of employment deal with its former CEO.[10]
Key Trends and Forces
Waddell's relatively small size inhibits competitive stance
Waddell & Reed is a relatively small asset management firm. To start, its assets under management total just $65 billion, which is dwarfed by household names like T. Rowe Price ($350 billion), Fidelity ($1.2 trillion), and Vanguard Group ($800 billion).[11] Note that the AUM values are of 2006. Smaller/less well known companies that take part in the asset management industry face a roadblock when it comes to competing and raising capital to manage. Even so, Waddell's AUM and net income hit all-time highs in 2007, thanks to net inflows and market appreciation. The company's ability to compete with the big name asset managers will depend on strong investment performance, especially through this subprime lending credit crisis.
2007 Credit Crunch limits Waddell & Reed's ability to repay loans
As of 2007, Waddell has entered into 3 year credit facility agreements with lenders valued at $200 million.[12] And, with a 2007 net income of $126 million and general assets of nearly $894 million[13], paying off the debt could significantly impact Waddell fiscal operations. Also, because Waddell & Reed is a holding company, the ability to repay the loan will be determined by the earnings and distributions of those earnings by WDR's subsidiaries. Plus, with credit restructuring made more difficult by the credit crunch, WDR's options may be limited in this regard.
Competition
Waddell competes with a variety of companies within the financial services industry. However, its closest competitors include Eaton Vance, the Jefferies Group, and Legg Mason. Below is a chart of relevant operating metrics for Waddell and Reed and its industry competitors.
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References
- ↑ WDR 2007 10-K pg. 5
- ↑ 2.0 2.1 2.2 WDR 2007 10-K pg. 23
- ↑ WDR 2007 Annual Report pg. 2
- ↑ 4.0 4.1 4.2 4.3 4.4 WDR Earnings Call Transcript 2Q2008
- ↑ 5.0 5.1 5.2 WDR 2007 Annual Report pg. 3
- ↑ WDR 2007 Annual Report pg. 5
- ↑ WDR 2007 10-K pg. 14
- ↑ WDR 2007 Annual Report pg. 9
- ↑ WDR 2007 Annual Report pg. 7
- ↑ 10.0 10.1 WDR 2006 Annual Report pg. 30
- ↑ Wikinvest Janus Capital Competitors AUM
- ↑ WDR 2007 10-K pg. 19
- ↑ WDR 2007 10-K pg. 23
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