Franklin Resources: Deep Value Amidst Ongoing Challenges and Market Uncertainty

Franklin Resources (NYSE:), a prominent player in the asset management industry, has faced significant challenges in recent years despite its deep value appeal. Known for its flagship brand, Franklin Templeton, the company has struggled to leverage its size and acquisitions effectively in a competitive market that increasingly favors ETF-dominated strategies.

In 2019, Franklin’s $5.7 billion acquisition of Legg Mason (NYSE:) was a strategic move aimed at expanding its footprint and diversifying into ETFs. This deal doubled its assets under management (AUM) from $700 billion to $1.5 trillion. At the time, this growth appeared promising, as the combined entity was generating substantial revenue. However, the anticipated synergy was tempered by persistent issues with higher expense ratios and continued asset outflows.

A solid foundation, but the share price tells a different story

Despite a strong balance sheet and a seemingly attractive valuation—trading around 10 times earnings—the stock price has struggled. From a high of $35 in 2019, shares fell to around $15 at the onset of the pandemic, recovered to $35 by 2021, and have since dropped again to around $21.

This volatility underscores ongoing investor skepticism about Franklin’s ability to stabilize its asset base and improve profitability. The company’s efforts to address these issues through additional smaller acquisitions, such as the $925 million deal for Putnam, have not yet resolved the core challenges. Although these moves have contributed to a temporary uptick in AUM, Franklin still grapples with high asset outflows, which totaled $21 billion in 2022 and continued to be a concern into 2023.

Recent financial performance reflects these ongoing struggles. Revenue fell to $7.8 billion in the last fiscal year, with a corresponding drop in operating profits. Despite a recovery in AUM to $1.63 trillion by mid-2024, outflows have persisted, although at a reduced pace. The company has seen some improvement, with year-to-date revenues up 7% and adjusted earnings modestly increasing.

Value Opportunity?

Franklin’s current valuation, with shares trading at a low multiple of 8-9 times earnings, presents a potential value opportunity. The company’s dividend yield of nearly 6% is also attractive for income-seeking investors. However, the persistent issue of asset outflows and the erosion of book value—partly due to high goodwill—raises concerns about the sustainability of this value proposition.

In summary, while Franklin Resources offers deep value and an appealing dividend, its ongoing challenges and market uncertainties make it a complex investment. Investors may consider a cautious approach, potentially taking a small position, but should remain wary of the broader issues affecting the company’s long-term outlook.