Federated Hermes (FHI) Aid for strategic buyouts, cost issues remain

Federated Hermes FHI has benefited from strategic acquisitions and operational expansion efforts. These bode well for revenue growth and improving the balance of assets under management (AUM). However, rising spending and a tight regulatory environment remain short-term concerns.

The acquisitions of money market assets by Federated Hermes bode well, especially given the current pressure on money market funds in a tight regulatory environment. The increase in money market AUMs will provide the company with various new fund offerings that will benefit its clients.

In recent years, FHI has expanded its operations into the UK and Chile, while continuing to seek alliances to expand into Europe, the Asia-Pacific region and the United States. Last year, it completed the takeover of certain investment management assets of Horizon Advisers and acquired the remaining 29.5% stake in London-based Hermes Fund Managers Limited from BT Pension Scheme. Its average assets under management recorded a compound annual growth rate (CAGR) over four years (end 2021) of 15.1%. Driven by the company’s inorganic growth efforts, this momentum should also continue to improve in the period ahead.

Additionally, Federated Hermes has a strong balance sheet. At the end of 2021, the company’s long-term debt was $223.4 million, and cash and other investments totaled $426.7 million. Given a decent liquidity position and manageable debt levels, the company has less risk of interest and debt default if the economic situation deteriorates.

However, Federated Hermes’ operating expenses have been on an upward trend for the past few years with a four-year (2018-2021) CAGR of 5.1%. Compliance costs are expected to increase in the near term due to the tightly regulated nature of the investment management business. Additionally, the company expects new hires to drive up compensation spending in the first quarter of 2022. Distribution spending and travel are also expected to increase, while continued investment in technology will increase system costs and communications.

In addition, Federated waived fees for certain money market funds to allow certain funds to maintain positive or zero net returns. Fees waived increased slightly in 2021, 2020 and 2018 based on current assets and yields, whereas they were flat in 2019. As such, the continued acceleration of fees waived could negatively impact the performance of the figure. short-term Federated business.

Currently, Federated Hermes carries a Zacks Rank #3 (Hold). Over the past year, the company’s shares have gained 9.2% against a 13.2% decline recorded by the industry.

Financial actions to consider

Some top-ranked stocks in the banking space are Bank of Hawaii BOH, First business financial services FBIZ, and BPC Bancorp PCBs. Currently, Bank of Hawaii sports a Zacks rank #1 (strong buy), while FBIZ and PCB carry a Zacks rank #2 (buy). You can see the full list of today’s Zacks #1 Rank stocks here.

Over the past six months, shares of PCB have jumped 15.9%, while shares of FBIZ and BOH have risen 14.3 and 5.2%, respectively.

Over the past 30 days, the Zacks consensus estimate for current-year earnings for First Business has been revised slightly higher, while the same for PCB Bancorp and Bank of Hawaii has remained constant.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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