Ameriprise Upped To Outperform

Given the current market recovery factor and valued growth indicators, we are upgrading our recommendation for the shares of Ameriprise Financial Inc. (NYSE:AMP) to Outperform from Neutral. Although the current economic turmoil has weakened growth and the operating leverage of organizations across the financial industry, we believe that once the economy rebounds, it will also have a substantial positive effect on the earning power of the company.
 
Ameriprise’s fourth-quarter earnings per share of 91 cents was substantially ahead of the Zacks Consensus Estimate of 75 cents and 80 cents in the prior-year quarter. Results for the quarter primarily benefited from increased asset-based fees from market appreciation, net inflows in wrap accounts and asset management and higher income from spread products as a result of its re-engineering efforts. Over time, the company has expanded significantly to serve the changing market demands in the new-era society.
 
Despite the weak global economic cues, Ameriprise continues to grow modestly on vigorous expense management, primarily from enhanced operational efficiencies. The company’s re-engineering efforts help it to generate substantial business and portfolio cash flow that make way for lucrative long-term investments.

Ameriprise has over-achieved its re-engineering expense savings target of $350 million with over $400 million saved in fiscal 2009. This increasing business momentum, along with the continued focus on delivering cost savings to the bottom line, provides important earnings leverage for the future.
 
Ameriprise continues to operate on a healthy balance sheet by utilizing enterprise risk management capabilities and product hedging to anticipate and mitigate risk. The variable annuity hedging program continues to perform well. The modest dip in the company’s debt-to-total capital ratio, from 22.1% at the end of fiscal 2008 to 19.5% at the end of 2009, projects management’s ability to pose significant capital leverage for Ameriprise in future.
 
Ameriprise has grown inorganically as well and restructured its portfolio from time to time through acquisitions, sales and spin-offs. In September 2009, the company announced a definitive agreement to acquire the long-term asset management business of Columbia Management, a unit of the Bank of America Corp. (NYSE:BAC), for approximately $1 billion. This fits well with Ameriprise’s long-term asset management offerings.

The transaction is expected to be completed in the spring of 2010. Management projects the transaction to be accretive to operating earnings and ROE within one year. Additionally, the fundamentals of the core business are improving slowly but steadily after the extreme downturn in 2008, with new client growth and improved asset levels and product flows.
 
Though the current global economic scenario is a cause of concern for Ameriprise’s critical sustainability factor, in the long term, the company has the potential to realize the full benefits of its strategic and cost-cutting initiatives through its diverse business mix, a healthy balance sheet with lucrative long-term investments and careful restructuring policy.
 
On Tuesday, the shares of Ameriprise closed at $39.77, down 1.8%, on New York Stock Exchange.