Franklin Resources has had an impressive run over the past six months as its shares have beaten the S&P 500 by 19.8%. The stock now trades at $32.49, marking a 28.4% gain. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Franklin Resources, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Franklin Resources Will Underperform?
Despite the momentum, we’re sitting this one out for now. Here are three reasons we avoid BEN, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance can indicate its overall quality. Any business can have short-term success, but a top-tier one grows for years.
Regrettably, Franklin Resources’s revenue grew at a tepid 5.4% compounded annual growth rate over the last five years. This fell short of our benchmark for the financials sector.
2. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Franklin Resources, its EPS declined by 1.6% annually over the last five years while its revenue grew by 5.4%. This tells us the company became less profitable on a per-share basis as it expanded.
3. Previous Growth Initiatives Haven’t Impressed
Return on equity (ROE) measures how effectively financial firms generate profit from each dollar of shareholder equity — a critical funding source. High-ROE institutions typically compound shareholder wealth faster over time through retained earnings, share repurchases, and dividend payments.
Over the last five years, Franklin Resources has averaged an ROE of 8%, uninspiring for a company operating in a sector where the average shakes out around 10%.
Final Judgment
We cheer for all companies supporting the economy, but in the case of Franklin Resources, we’ll be cheering from the sidelines. With its shares beating the market recently, the stock trades at 11.2× forward P/E (or $32.49 per share). At this valuation, there’s a lot of good news priced in - we think other companies feature superior fundamentals at the moment. We’d recommend looking at a dominant aerospace business that has perfected its M&A strategy.
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