Federated Investors FII | The Dog Days of Summer are a Saint Bernard - Best Idea Long

Takeaway: Money fund yields are making their most buoyant move all year, already up 5 basis points or +38% over 2Q15 averages.

  • Money funds yields are putting in their fastest ascent in 2015 with an already 5 basis point or +38% increase thus far in 3Q from the second quarter. Our short yield tracker of LIBOR, 3 Month Treasuries, and Reverse Repos registered 18.0 basis points over night, closing in on close to a +40% move higher from the 13.0 basis point average of 2Q15. Simply put, the market is not waiting for the long waited announcement of the plight of the Fed Funds rate and is instead moving higher quickly.
  • We calculate that for every basis point increase in our short yield proxy that Federated nets an additional penny or $0.01 per share in quarter earnings. While most of Federated's biggest money fund portfolios have 40 days of duration within their holdings, the blend to higher yielding portfolios is underway. Longer term we see Federated normalized earnings opportunity at between $2.43-$2.63 per share and with the Street at $2.22 for 2016/2017, we continue to see positive risk/reward.
  • In combination with improved profitability as yields move higher, we remind investors that money fund balances should also increase into the back half of the year. With tax season now out of the way which historically has pulled down money fund balances in the first and second quarters, money funds are soon to be entering the fourth quarter which has averaged a +3.7% increase sequentially since 2008. Federated stock is one of only two asset management stocks up for the year (Wisdom Tree is up +57% in '15 with Federated up +4.0%, with the rest of the sector now down year-to-date). FII stock still screens as one of the lowest rated in our proprietary Sentiment Monitor (see latest report HERE) with 8.9% short interest and low sell side sentiment. With a 2.9% dividend yield and improving fundamentals in the money fund business, the stock continues on our Best Ideas list as a Long position. We estimate fair value at $42 per share.

Not waiting one Minute (Fed). Money fund yields are bolting substantially higher in 3Q already up 5 basis points or +38% from 2Q averages:

 

Federated Investors FII | The Dog Days of Summer are a Saint Bernard - Best Idea Long - chart 1 yields

Federated Investors FII | The Dog Days of Summer are a Saint Bernard - Best Idea Long - final proxy chart

 

While investors will have to wait for current spot rates to blend into quarterly averages, duration is very short in these portfolios. Within 39 days, higher spot yields will blend into quarterly averages:

 

Federated Investors FII | The Dog Days of Summer are a Saint Bernard - Best Idea Long - chart 3 duration

 

We calculate that every 1 basis point of average increase in yields is $0.01 or a penny per share in incremental quarterly earnings:


Federated Investors FII | The Dog Days of Summer are a Saint Bernard - Best Idea Long - EPS sensitivity

 

Our short rate proxy and FII's money fund fee waivers continue to maintain a very robust R-squared at 0.89:

 

Federated Investors FII | The Dog Days of Summer are a Saint Bernard - Best Idea Long - chart 4 regression

 

In addition to rising yields, money funds are now out of the seasonally weak tax season and onto the back half of the year where historically balances have grown for the industry. Thus the company will enjoy the double leverage of improving profitability and higher fund balances:

 

Federated Investors FII | The Dog Days of Summer are a Saint Bernard - Best Idea Long - chart 6 seasonality

 

 

Money Fund Yields are Yellin'

Bearishness Starting To Thaw

FII - Hedgeye Knows a Hockey Stick When it Sees One

Baby Steps But Headed in the Right Direction

Federated - Hedgeye Best Ideas Long Black Book

 

Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA

 

 


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