Leveraging AI And Blockchain For Growth Amidst Market Challenges And Calculated Acquisitions

Key Takeaways

• Strategic acquisitions and market diversification are driving revenue growth by expanding Franklin Resources' asset offerings and client base.
  
• Investments in technology, such as AI and blockchain, aim to enhance efficiency, bolster margins, and strengthen competitive positioning.
  
• Significant outflows, market volatility, and integration challenges threaten revenue growth, net margins, and long-term prospects amidst heightened competition and regulatory scrutiny.

Catalysts

A publicly owned asset management holding company.

• Franklin Resources has significantly diversified its assets under management (AUM) and revenue base through strategic acquisitions in high-growth areas, which are expected to continue driving revenue and earnings by offering more choices to a larger client base.
  
• The company aims to capitalize on the growing convergence of public and private markets, leveraging its capabilities in both areas, potentially boosting revenue and net margins with increased offerings in alternative investments.
  
• The expansion of investment solutions, particularly in the ETF and SMA spaces, has shown substantial growth, and the company plans to scale these AUM by 3x and 5x, respectively, which could significantly impact revenue growth and net margins.
  
• The focus on private wealth management and the anticipated generational wealth transfer represents a significant opportunity to grow AUM and revenue, as Franklin Resources plans to double the size of Fiduciary Trust International through organic and acquisition strategies.
  
• The company's investments in AI and blockchain aim to enhance operational efficiencies and client service, which should improve net margins and provide a competitive edge, potentially increasing earnings in the long term.

Franklin Resources Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Franklin Resources's revenue will decrease by -1.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.1% today to 13.6% in 3 years time.
• Analysts expect earnings to reach $1.1 billion (and earnings per share of $2.25) by about November 2027, up from $432.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.9x on those 2027 earnings, down from 26.0x today. This future PE is lower than the current PE for the US Capital Markets industry at 23.6x.
• Analysts expect the number of shares outstanding to decline by 1.73% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.44%, as per the Simply Wall St company report.

Franklin Resources Future Earnings Per Share Growth

Risks

• The ongoing investigations into Western Asset's trade allocations and the resulting $53.6 billion in outflows could further impact Franklin Resources’ revenue and operating margins due to the reputational harm and potential regulatory penalties.
  
• High outflows from Western Asset, amidst the ongoing investigation, have resulted in significant revenue declines for Franklin, potentially affecting the firm's net earnings and long-term growth prospects.
  
• The complex nature of integrating acquired firms like Putnam and Western while maintaining operational independence introduces risk in execution which could affect net margins if cost synergies are not realized as planned.
  
• Global market volatility and uncertainty regarding inflation and interest rates could negatively impact investment performance and the ability to attract new asset flows, influencing overall revenue growth.
  
• Increased competition and pressure on fee structures in the asset management industry could constrain Franklin Resources' revenue growth and compress net margins if higher-value services do not consistently attract client inflows.

Valuation

• The analysts have a consensus price target of $19.79 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 $22.0, and the most bearish reporting a price target of just $18.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $8.2 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 10.9x, assuming you use a discount rate of 7.4%.
• Given the current share price of $21.48, the analyst's price target of $19.79 is 8.6% lower. 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.