Franklin Resources’s 21.8% return over the past six months has outpaced the S&P 500 by 16%, and its stock price has climbed to $27.59 per share. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy Franklin Resources, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Franklin Resources Will Underperform?
We’re happy investors have made money, but we're sitting this one out for now. Here are three reasons there are better opportunities than BEN and a stock we'd rather own.
1. Lackluster Revenue Growth
Long-term growth is the most important, but within financials, a stretched historical view may miss recent interest rate changes and market returns. Franklin Resources’s recent performance shows its demand has slowed as its annualized revenue growth of 4.5% over the last two years was below its five-year trend. We’re wary when companies in the sector see decelerations in revenue growth, as it could signal changing consumer tastes aided by low switching costs. 
Note: Quarters not shown were determined to be outliers, impacted by outsized investment gains/losses that are not indicative of the recurring fundamentals of the business.
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Franklin Resources, its EPS declined by 2.5% annually over the last five years while its revenue grew by 9%. 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, or ROE, quantifies bank profitability relative to shareholder equity - an essential capital source for these institutions. Over extended periods, superior ROE performance drives faster shareholder wealth compounding through reinvestment, share repurchases, and dividend growth.
Over the last five years, Franklin Resources has averaged an ROE of 8.3%, uninspiring for a company operating in a sector where the average shakes out around 10%.
Final Judgment
We see the value of companies driving economic growth, but in the case of Franklin Resources, we’re out. With its shares beating the market recently, the stock trades at 10.5× forward P/E (or $27.59 per share). This valuation tells us a lot of optimism is priced in - you can find more timely opportunities elsewhere. We’d recommend looking at a dominant Aerospace business that has perfected its M&A strategy.
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