On Monday, Deutsche Bank maintained a Buy rating on Federated Hermes Inc. (NYSE:FHI) and increased the price target to $43.00 from the previous $42.00. The adjustment followed the company's third quarter earnings report, which exceeded Deutsche Bank's and market expectations.
Federated Hermes reported an earnings per share (EPS) of $1.06 for the third quarter of 2024, surpassing both the consensus estimate of $0.93 and Deutsche Bank's estimate of $0.92. The analysis by Deutsche Bank suggests that when accounting for a lower-than-expected tax rate, which provided a $0.03 tailwind, the core EPS would be approximately $1.03.
The quarter's financial results were described as mixed by Deutsche Bank. Although the reported figures were notably higher than anticipated, various factors such as tax rate adjustments, 'other' expenses, and non-operating items, indicated a performance more aligned with expectations after certain adjustments. Despite the complexities, the market responded well to the reported earnings.
The bank's report also highlighted the current volatility in market flows, with various factors influencing both inflows and outflows. However, the outlook for institutional money fund assets appears positive. Management at Federated Hermes anticipates a potential increase of 10-20% in institutional money fund assets as clients may shift from short-term instruments to money market products during an anticipated rate cut cycle.
Projections by Deutsche Bank include an estimated increase of approximately $30 billion in total money market assets under management (AUM), encompassing both mutual funds and separately managed accounts (SMA), in the fourth quarter of 2024. Further growth is expected with an estimated $91 billion in 2025 and around $38 billion in 2026. The raised price target to $43 reflects a more optimistic outlook based on higher expected EPS for the year 2025.
In other recent news, Federated Hermes has seen its target raised to $41 from $38 by Evercore ISI, following better-than-expected long-term outflows. The firm reported long-term outflows of -$0.4 billion, a significant improvement from the previous quarter's -$5 billion. The progress in Federated Hermes's equity segment was a key factor in the revised expectations. Evercore ISI suggests that if Federated Hermes's equity funds continue to recover, the company could reverse a four-quarter negative streak.
In recent developments, the Federal Reserve has signaled potential rate cuts in response to weakening economic data and employment figures. Federal Reserve Governor Lisa Cook has expressed support for recent rate cuts, emphasizing the importance of preserving the current labor market. Analysts from Morgan Stanley and Oxford Economics have also weighed in, suggesting that market reactions and the Fed's next steps will depend on various factors including policymakers' rate projections and inflation targets.
Lastly, the Federal Reserve has shifted its focus from inflation to the job market, indicating a potential change in monetary policy direction. Jerome Powell, the Federal Reserve Chair, has suggested that the Fed may soon reduce interest rates to address emerging job market risks. The upcoming employment reports will be crucial in determining the pace and extent of the rate cuts needed to achieve full employment.
InvestingPro Insights
To complement Deutsche Bank's positive outlook on Federated Hermes Inc. (NYSE:FHI), recent data from InvestingPro provides additional context to the company's financial health and market performance. As of the last twelve months ending Q3 2024, Federated Hermes reported a revenue of $1.60 billion, with a modest growth of 0.44%. The company's P/E ratio stands at 12.21, suggesting a relatively attractive valuation compared to some peers in the financial sector.
InvestingPro Tips highlight that Federated Hermes has maintained dividend payments for 27 consecutive years, underscoring its commitment to shareholder returns. This aligns well with the company's current dividend yield of 3.21%, which may be appealing to income-focused investors. Additionally, the company's management has been aggressively buying back shares, which could potentially support earnings per share growth and signal confidence in the company's future prospects.
It's worth noting that Federated Hermes' cash flows can sufficiently cover interest payments, indicating a solid financial position. This strength is particularly relevant given Deutsche Bank's expectations for growth in institutional money fund assets and the potential for increased AUM in the coming years.
For investors seeking a more comprehensive analysis, InvestingPro offers 7 additional tips for Federated Hermes, providing deeper insights into the company's financial health and market position.
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