Federated (FII) or Franklin (BEN): Which Stock is Better?

Federated Investors, Inc. FII and Franklin Resources, Inc. BEN — the two investment managers — have market capitalization of $3.5 billion and $23.9 billion, respectively. Being based in the same region, both companies are influenced by a similar economic environment.

The Zacks Industry Rank is #76 (top 30% of the 250 plus Zacks industries) for the industry, to which these companies belong to. Our back-testing shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than two to one.

Benefits from a stabilizing economy and gradually improving interest-rate scenario have positioned the industry well. In terms of price performance, Federated’s shares have gained 23.3% over the past year, while Franklin’s shares have declined 7.4%.

Though both asset managers have similar business trends, deeper research into the financials will help decide which investment option is better.

Federated

Federated has a trailing 12-month ROE of 33.2% compared with the industry average of 13.5%. This shows the company reinvests its earnings more efficiently.

Further, the stock looks undervalued with respect to its price-to-earnings (P/E) and PEG ratios. It has a P/E ratio of 11.99 compared with the S&P 500 average of 17.7. Further, the PEG ratio is 1.3 compared with the S&P 500 average of 1.87.

In addition, Federated’s debt/equity ratio is valued at 0.22 compared to the S&P 500 average of 0.70, indicating a relatively lower debt burden. It highlights the financial stability of the company even in adverse economic conditions. Moreover, its earnings for the current year are projected to jump 27.5%, while sales are likely to record growth of 2.4%.

Analysts seem optimistic about the stock’s earnings prospects. Over the last 60 days, Federated has witnessed four upward revisions (against no downward revisions) for 2018. The Zacks Consensus Estimate has moved up 23% to $2.78 for the year.

Federated has a Value Score of B. Further, the stock flaunts a Zacks Rank #1 (Strong Buy). Our research shows that stocks with a Value Score of B, when combined with a Zacks Rank #1 or 2 (Buy), offer the best upside potential.

Franklin

Franklin has a trailing 12-month Return on Equity (ROE) of 13.9% compared with the industry average of 13.5%. This suggests that the company is more efficient in reinvesting its earnings.

Further, its debt/equity ratio of 0.09 comes below the S&P 500 average of 0.70. This reflects that the company has a relatively lower debt burden and will be financially stable during turbulent economic conditions.

Additionally, the stock looks undervalued with respect to its P/E and P/B ratios. It has a forward P/E ratio of 12.06 compared with the S&P 500 average of 17.7. Furthermore, the company’s P/B ratio of 1.8 comes below the S&P 500 average of 3.34.

Moreover, the company’s current-year earnings are projected to rise 8.3%, while sales are estimated to inch up 1.6%.

Also, analysts seem optimistic about the stock’s financial performance. For the current year, it witnessed six upward revisions (against no downward revision) over the past two months. As a result, the Zacks Consensus Estimate for 2018 has climbed 11.3% to $3.26.

Franklin currently carries a Zacks Rank #2. Also, it has a Value Score of B. You can see the complete list of today’s Zacks #1 Rank stocks here.

Our Take

Both Federated and Franklin look well positioned in terms of ROE, Zacks Rank, undervalued shares and Value Score. However, better sales and earnings growth potential make Federated a better pick.

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