Legacy Fees And Rising Tech Rivals Will Weaken Prospects

Key Takeaways

• Persistent outflows from active funds and rising competition from fintech disruptors threaten Franklin's fee income, asset base, and long-term earnings power.
  
• High costs, limited scale, and unproven digital investments constrain margin expansion, leaving Franklin exposed to ongoing revenue and profitability challenges.
  
• Expansion into alternatives, global diversification, technology innovation, and cost initiatives are strengthening revenue stability, operational efficiency, and long-term earnings potential.

Catalysts

A publicly owned asset management holding company.

• The structural migration toward passive investing and exchange-traded funds has resulted in sustained outflows from traditional actively managed mutual funds, which account for a significant share of Franklin's legacy business; this trend will continue to erode both assets under management and fee income, pressuring revenue and earnings long-term.
  
• Digital transformation and the proliferation of low-cost, technology-driven competitors-including direct indexing platforms and fintech disruptors-will further compress management fees in both active and alternative products, preventing Franklin from offsetting legacy outflows and driving down net margins across the business.
  
• Demographic shifts, especially generational wealth transfers to younger, tech-native investors, will accelerate adoption of DIY and robo-advised solutions, reducing institutional and individual demand for Franklin's high-fee, actively managed products and limiting future AUM growth opportunities.
  
• Franklin faces elevated operating costs to maintain a sprawling global distribution network and comply with intensifying regulatory scrutiny, but lacks the scale advantages of the largest asset managers; with no clear ability to generate major margin expansion, operating leverage will remain muted and earnings growth subdued.
  
• The company's investments in distributed ledger and tokenized funds, while novel, risk being undermined by faster-moving rivals and slow regulatory adoption, resulting in substantial sunk costs and minimal impact on AUM growth or profitability over the medium term.

Franklin Resources Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Franklin Resources compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Franklin Resources's revenue will decrease by 0.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 3.1% today to 11.5% in 3 years time.
• The bearish analysts expect earnings to reach $972.5 million (and earnings per share of $1.94) by about August 2028, up from $270.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 12.8x on those 2028 earnings, down from 47.9x today. This future PE is lower than the current PE for the US Capital Markets industry at 26.8x.
• Analysts expect the number of shares outstanding to decline by 0.73% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.81%, as per the Simply Wall St company report.

Franklin Resources Future Earnings Per Share Growth

Risks

• The company's expansion and success in alternatives, including private markets, direct lending, and perpetual funds, is driving strong net inflows and higher fee revenue, which could lead to improved long-term revenue and net margins if these trends continue.
  
• Franklin Resources is leveraging technology and innovation, particularly in tokenization and blockchain, to lower operational costs and create new revenue streams. Early success with products like the Benji money market fund, patents, and potential for white-labeling its digital infrastructure could lead to significant cost efficiencies and increase future earnings power.
  
• The integration of acquisitions such as Putnam, Apera, Alcentra, and Lexington is resulting in significant diversification across product lines, geographies, and asset classes, which reduces concentration risk and helps stabilize revenue and margins against market and sector volatility.
  
• The company's global footprint and increasing traction in non-U.S. markets, including mandates from sovereign wealth funds, strong distribution in emerging markets, and steady international net inflows, enhance its ability to capture growth from expanding global wealth and asset allocation shifts-benefiting long-term revenue growth.
  
• Cost discipline and operational efficiency initiatives, including technology investments and targeted $200 million run-rate cost savings, align with growth in higher-margin businesses like alternatives and ETFs, positioning Franklin Resources to boost operating margins and deliver stronger long-term earnings.

Valuation

• The assumed bearish price target for Franklin Resources is $19.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Franklin Resources's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $31.0, and the most bearish reporting a price target of just $19.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $8.4 billion, earnings will come to $972.5 million, and it would be trading on a PE ratio of 12.8x, assuming you use a discount rate of 8.8%.
  
• Given the current share price of $24.99, the bearish analyst price target of $19.0 is 31.5% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.