New Products Like Lexington Private Markets Fund Will Expand Private Market Access

Key Takeaways

• Focus on active management and alternatives investments targets revenue growth and diversified earnings through alpha generation and wealth client allocations.
  
• Operational efficiency initiatives and private market expansion aim to enhance margins and stimulate earnings growth through diversified revenue streams.
  
• Geopolitical and market challenges, negative net outflows, and increased competition threaten Franklin Resources' revenue, margins, and strategic integration efficiency.

Catalysts

A publicly owned asset management holding company.

• Franklin Resources is focusing on active management, which benefits from increased dispersion in global equity markets. This could lead to higher revenue as active managers can capitalize on identifying mispriced securities to generate alpha.
  
• The integration of corporate functions at Western Asset Management is expected to create operational efficiencies and broader resource access, potentially improving net margins in the fiscal year 2026.
  
• The expansion into private markets with new products, such as the Franklin Lexington Private Markets Fund, targets increased allocations from wealth clients and could significantly boost revenue growth.
  
• Franklin Resources' emphasis on alternatives and wealth channel investments aims to double their alternatives capital raise to 20% to 30%, driving earnings growth through diversified revenue streams.
  
• The strategic focus on reducing operational expenses by $200-$250 million by fiscal 2026 is anticipated to enhance earnings through improved operating margins.

Franklin Resources Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Franklin Resources's revenue will decrease by 5.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.9% today to 14.0% in 3 years time.
• Analysts expect earnings to reach $1.0 billion (and earnings per share of $1.89) by about April 2028, up from $338.8 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $1.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.2x on those 2028 earnings, down from 27.2x today. This future PE is lower than the current PE for the US Capital Markets industry at 24.2x.
• Analysts expect the number of shares outstanding to decline by 0.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.95%, as per the Simply Wall St company report.

Franklin Resources Future Earnings Per Share Growth

Risks

• Geopolitical uncertainty, market volatility, and inflation could adversely impact global equity returns and investor sentiment, thereby affecting Franklin Resources' revenue and earnings.
  
• Persistent negative net outflows, particularly from Western Asset Management, pose a risk to overall revenue and might pressure the firm's margins and earnings.
  
• Decreased adjusted operating income by 9% from the prior quarter indicates challenges in maintaining profit margins amidst market fluctuations and outflow issues.
  
• The company faces strategic integration challenges with legacy acquisitions like Western Asset Management; slow progress in achieving expected synergies could hinder cost efficiencies, impacting net margins.
  
• Increased competition in both public and private market asset management might dilute returns, obstructing Franklin's ability to maintain its revenue growth trajectory and capturing new assets under management.

Valuation

• The analysts have a consensus price target of $17.682 for Franklin Resources based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $21.0, and the most bearish reporting a price target of just $15.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $7.4 billion, earnings will come to $1.0 billion, and it would be trading on a PE ratio of 11.2x, assuming you use a discount rate of 7.9%.
• Given the current share price of $17.55, the analyst price target of $17.68 is 0.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.