FHI
FHI
Hold 2026-03-24
Model
DCF
Price at Report
$56.29
Base IV
$55.82
Bear IV
$32.14
Bull IV
$98.51
Entry Zone: 34-51 · Sell Above: 84
Bore Family Office
Valuation Report — Federated Hermes (FHI) • March 24, 2026
Unlevered DCF (FCFF @ WACC) • Discount Rate: 9.50% • Current Price: $56.29
Prepared by Lurch • Bore Family Office • Data: Finnhub, StockAnalysis.com, S&P Global Market Intelligence
🏢 Business Overview
Federated Hermes, Inc. is one of the largest investment management firms in the United States, managing $902.6 billion in assets as of Q4 2025 — a record. Founded in 1955 and headquartered in Pittsburgh, PA, the firm is a dominant player in money market funds ($682.6B, 76% of total AUM) and offers a diversified suite of equity ($97.9B), fixed income ($100.1B), and alternative/private market ($19.1B) strategies across mutual funds, ETFs, SMAs, and institutional mandates. The 2018 merger with Hermes Investment Management added a strong ESG/responsible investing platform.
FY2025 was an exceptional year with EPS of $5.13 (+59% YoY) driven by record AUM, strong money market inflows in the high-rate environment, and aggressive share buybacks (shares outstanding declined from 86M to 76M). Revenue grew 10% to $1.8B with operating margin expanding to 28.5%. The company is highly capital-light with ROE of 35% and returns substantially all free cash flow to shareholders via dividends (2.4% yield) and buybacks (5.5% yield), totaling ~8% shareholder yield.
| Business Segment | Revenue | % of Total | YoY Growth | Margin | Notes |
|---|---|---|---|---|---|
| Money Market | $954M | 53% | +8.0% | — | $682.6B AUM (record); rate-sensitive revenue; 76% of total AUM |
| Equity | $504M | 28% | +23.0% | — | $97.9B AUM (+23% YoY); higher-margin active strategies |
| Fixed Income | $198M | 11% | +2.0% | — | $100.1B AUM (+2% YoY); stable institutional mandates |
| Alternatives & Multi-Asset | $108M | 6% | +1.0% | — | $22.0B AUM; private markets, real estate, infrastructure |
| Other | $37M | 2% | +0.0% | — | Administrative and distribution services |
| Blended Growth Rate | — | 100% | +11.0% | — | Weighted avg across segments |
🔍 Quality Scorecard
| Metric | Value | Assessment |
|---|---|---|
| ROIC | 35.3% | ≥12% strong |
| FCF Margin | 16.4% | ≥10% strong |
| Debt / EBITDA | 0.8x | ≤2x conservative |
| Revenue Trend | Growing 3yr | 3-year directional trend |
| FCF Margin Trend | Stable (±1pp) | Directional margin trajectory |
| Analyst Revisions | Upward revisions | Last 90 days consensus direction |
✅ Quality profile supports the valuation
📊 Financial Snapshot
| Metric | 2021 | 2022 | 2023 | 2024 | 2025 |
|---|---|---|---|---|---|
| Revenue ($M) | $1,300 | $1,446 | $1,610 | $1,632 | $1,801 |
| EBITDA ($M) | $396 | $365 | $414 | $384 | $536 |
| Operating Income ($M) | $366 | $337 | $388 | $361 | $514 |
| Net Income ($M) | $270 | $240 | $299 | $268 | $403 |
| EPS (diluted) | $2.75 | $2.65 | $3.40 | $3.23 | $5.13 |
| Free Cash Flow ($M) | $155 | $320 | $304 | $343 | $295 |
| Annual DPS | $1.080 | $1.080 | $1.110 | $1.210 | $1.330 |
| Total Debt ($M) | $346 | $453 | $458 | $462 | $457 |
| Rev YoY Growth | — | +11.2% | +11.3% | +1.4% | +10.4% |
| Gross Margin | 46.7% | 42.8% | 41.9% | 43.4% | 43.8% |
| EBITDA Margin | 30.5% | 25.2% | 25.7% | 23.5% | 29.8% |
| Operating Margin | 28.2% | 23.3% | 24.1% | 22.1% | 28.5% |
| Net Margin | 20.8% | 16.6% | 18.6% | 16.4% | 22.4% |
⚙️ WACC Build (DCF)
| Input | Value | Notes |
|---|---|---|
| Risk-Free Rate (Rf) | 4.30% | 10-yr US Treasury yield |
| Beta (β) | 0.710 | Market beta (Finnhub) |
| Equity Risk Premium (ERP) | 5.5% | Damodaran US ERP |
| Cost of Equity (Ke) | 8.20% | Ke = Rf + β × ERP |
| Pre-Tax Cost of Debt | 4.50% | Interest exp / gross debt |
| After-Tax Cost of Debt (Kd) | 3.60% | × (1 − 21%) |
| Weight Equity (We) | 90.4% | Mkt cap $0.0B |
| Weight Debt (Wd) | 9.6% | Gross debt $0.0B |
| WACC | 9.50% | DCF discount rate |
📈 DCF Scenarios
$32
🔴 Bear
$56
📊 Base
$99
🚀 Bull
$56.29
Current Price
$54
Analyst Avg PT
| Scenario | Stage 1 (Yrs 1–5) | Stage 2 (Yrs 6–10) | Terminal g | WACC | Intrinsic Value | vs Price |
|---|---|---|---|---|---|---|
| 🔴 Bear | -2.0% | 0.0% | 2.0% | 10.50% | $32 | ▼42.9% |
| 📊 Base | 3.0% | 2.5% | 2.5% | 9.50% | $56 | ▼0.8% |
| 🚀 Bull | 7.0% | 4.0% | 3.0% | 8.50% | $99 | ▲75.0% |
📋 Full 10-Year Projection Tables
Bear Scenario
Stage 1: -2.0% | Stage 2: 0.0% | Terminal: 2.0%
| Period | Stage | FCFF | PV of FCFF | Cumulative EV |
|---|---|---|---|---|
| Year 1 ✦ | Stage 1 | $0.27B | $0.24B | $0.24B |
| Year 2 ✦ | Stage 1 | $0.26B | $0.21B | $0.46B |
| Year 3 ✦ | Stage 1 | $0.26B | $0.19B | $0.65B |
| Year 4 ✦ | Stage 1 | $0.25B | $0.17B | $0.81B |
| Year 5 ✦ | Stage 1 | $0.25B | $0.15B | $0.96B |
| Year 6 | Stage 2 | $0.25B | $0.14B | $1.10B |
| Year 7 | Stage 2 | $0.25B | $0.12B | $1.22B |
| Year 8 | Stage 2 | $0.25B | $0.11B | $1.34B |
| Year 9 | Stage 2 | $0.25B | $0.10B | $1.44B |
| Year 10 | Stage 2 | $0.25B | $0.09B | $1.53B |
| Terminal | — | TV=$3.0B | PV(TV)=$1.1B (42% of EV) | EV=$2.6B |
| Intrinsic Value | — | — | EV $2.6B − Net Debt → Equity / Shares | $32 |
How the price per share is derived: Each year's projected free cash flow is discounted back at WACC (10.50%) to get its present value. After Year 10, FCF grows at the terminal rate (2.0%) in perpetuity — the Gordon Growth formula gives a terminal value of FCF11 / (WACC − gT) = $3.0B. That terminal value is discounted back 10 years to today's dollars (PV of TV = $1.1B). Enterprise Value = PV of FCFs ($1.5B) + PV of TV ($1.1B) = $2.6B. Subtracting net debt gives equity value of $2.4B, divided by shares outstanding = $32 per share.
Base Scenario
Stage 1: 3.0% | Stage 2: 2.5% | Terminal: 2.5%
| Period | Stage | FCFF | PV of FCFF | Cumulative EV |
|---|---|---|---|---|
| Year 1 ✦ | Stage 1 | $0.30B | $0.28B | $0.28B |
| Year 2 ✦ | Stage 1 | $0.31B | $0.26B | $0.54B |
| Year 3 ✦ | Stage 1 | $0.32B | $0.25B | $0.78B |
| Year 4 ✦ | Stage 1 | $0.33B | $0.23B | $1.02B |
| Year 5 ✦ | Stage 1 | $0.34B | $0.22B | $1.23B |
| Year 6 | Stage 2 | $0.35B | $0.20B | $1.44B |
| Year 7 | Stage 2 | $0.36B | $0.19B | $1.63B |
| Year 8 | Stage 2 | $0.37B | $0.18B | $1.81B |
| Year 9 | Stage 2 | $0.38B | $0.17B | $1.98B |
| Year 10 | Stage 2 | $0.39B | $0.16B | $2.13B |
| Terminal | — | TV=$5.7B | PV(TV)=$2.3B (52% of EV) | EV=$4.4B |
| Intrinsic Value | — | — | EV $4.4B − Net Debt → Equity / Shares | $56 |
How the price per share is derived: Each year's projected free cash flow is discounted back at WACC (9.50%) to get its present value. After Year 10, FCF grows at the terminal rate (2.5%) in perpetuity — the Gordon Growth formula gives a terminal value of FCF11 / (WACC − gT) = $5.7B. That terminal value is discounted back 10 years to today's dollars (PV of TV = $2.3B). Enterprise Value = PV of FCFs ($2.1B) + PV of TV ($2.3B) = $4.4B. Subtracting net debt gives equity value of $4.2B, divided by shares outstanding = $56 per share.
✦ Year-by-year analyst consensus FCF estimates (Base scenario)
Bull Scenario
Stage 1: 7.0% | Stage 2: 4.0% | Terminal: 3.0%
| Period | Stage | FCFF | PV of FCFF | Cumulative EV |
|---|---|---|---|---|
| Year 1 ✦ | Stage 1 | $0.33B | $0.30B | $0.30B |
| Year 2 ✦ | Stage 1 | $0.36B | $0.31B | $0.61B |
| Year 3 ✦ | Stage 1 | $0.40B | $0.31B | $0.93B |
| Year 4 ✦ | Stage 1 | $0.43B | $0.31B | $1.24B |
| Year 5 ✦ | Stage 1 | $0.47B | $0.31B | $1.55B |
| Year 6 | Stage 2 | $0.49B | $0.30B | $1.85B |
| Year 7 | Stage 2 | $0.51B | $0.29B | $2.14B |
| Year 8 | Stage 2 | $0.53B | $0.28B | $2.42B |
| Year 9 | Stage 2 | $0.55B | $0.26B | $2.68B |
| Year 10 | Stage 2 | $0.57B | $0.25B | $2.93B |
| Terminal | — | TV=$10.7B | PV(TV)=$4.7B (62% of EV) | EV=$7.7B |
| Intrinsic Value | — | — | EV $7.7B − Net Debt → Equity / Shares | $99 |
How the price per share is derived: Each year's projected free cash flow is discounted back at WACC (8.50%) to get its present value. After Year 10, FCF grows at the terminal rate (3.0%) in perpetuity — the Gordon Growth formula gives a terminal value of FCF11 / (WACC − gT) = $10.7B. That terminal value is discounted back 10 years to today's dollars (PV of TV = $4.7B). Enterprise Value = PV of FCFs ($2.9B) + PV of TV ($4.7B) = $7.7B. Subtracting net debt gives equity value of $7.5B, divided by shares outstanding = $99 per share.
🔲 Sensitivity Table
| WACC \ gT | 1.5% | 2.0% | 2.5% | 3.0% | 3.5% |
|---|---|---|---|---|---|
| 7.5% | $70 | $74 | $79 | $85 | $92 |
| 8.0% | $64 | $68 | $72 | $76 | $82 |
| 8.5% | $60 | $62 | $65 | $69 | $74 |
| 9.0% | $55 | $58 | $60 | $63 | $67 |
| 9.5% | $52 | $54 | $56 | $58 | $61 |
| 10.0% | $48 | $50 | $52 | $54 | $56 |
| 10.5% | $46 | $47 | $48 | $50 | $52 |
| 11.0% | $43 | $44 | $45 | $47 | $49 |
| 11.5% | $41 | $42 | $43 | $44 | $45 |
Green = >10% above current price. Red = >10% below. Gold = within ±10%.
📉 Long-Term Price Trend Channel
Log-linear trend fitted to full price history. ±1.5σ bands. Green shaded zone = bottom 25% of historical range — historically attractive entry.
🏦 Comparable Valuation
| Company | P/E | AUM ($B) | Div Yield | ROE | Note |
|---|---|---|---|---|---|
| FHI (current) | 11.0x | $903B | 2.42% | 35.3% | Money market dominant; buyback-heavy |
| TROW (T. Rowe) | 14.2x | $1,600B | 4.1% | 25.0% | Premium active manager |
| BEN (Franklin) | 12.5x | $1,500B | 5.8% | 8.0% | Diversified; Legg Mason acq. |
| IVZ (Invesco) | 9.5x | $1,800B | 5.2% | 12.0% | Scale player; lower margins |
| WDR (Waddell) | 10.0x | $80B | 6.5% | 15.0% | Smaller peer; higher yield |
💰 Dividend / Distribution Analysis
| Metric | Value |
|---|---|
| Annual DPS | $1.360 |
| Current Yield | 2.42% |
| Consecutive Growth Years | 4 |
| 1-yr DPS CAGR | +9.9% |
| 3-yr DPS CAGR | +7.2% |
| 5-yr DPS CAGR | +6.0% |
| 10-yr DPS CAGR | +5.0% |
| Payout Ratio (DPS/EPS) | 26.5% |
| FCF Payout Ratio | 35.0% |
| Sustainability Verdict | Safe |
FHI's dividend is extremely well-covered at a 26.5% payout ratio ($1.36 DPS / $5.13 EPS). The company prioritizes buybacks over dividends — the 5.45% buyback yield dwarfs the 2.42% cash dividend yield. Total shareholder yield of ~8% is among the highest in the asset management industry. The low payout ratio provides a large buffer against earnings volatility from rate changes or AUM fluctuations. Dividend has been growing steadily ($1.08 → $1.36 over 4 years, ~6% CAGR).
🔮 Analyst Forecast Section
(a) EPS Consensus
| Year | Low / Actual | Avg | High | # Analysts | Type |
|---|---|---|---|---|---|
| 2021 | $2.75 | — | — | — | Actual |
| 2022 | $2.65 | — | — | — | Actual |
| 2023 | $3.40 | — | — | — | Actual |
| 2024 | $3.23 | — | — | — | Actual |
| 2025 | $5.13 | — | — | — | Actual |
| 2026 | $4.96 | $5.15 | $5.43 | 9 | Estimate |
| 2027 | $5.44 | $5.74 | $6.21 | 9 | Estimate |
(b) Revenue Consensus
| Year | Low / Actual | Avg | High | # Analysts | Type |
|---|---|---|---|---|---|
| 2021 | $1.3B | — | — | — | Actual |
| 2022 | $1.4B | — | — | — | Actual |
| 2023 | $1.6B | — | — | — | Actual |
| 2024 | $1.6B | — | — | — | Actual |
| 2025 | $1.8B | — | — | — | Actual |
| 2026 | $1.9B | $2.0B | $2.1B | 6 | Estimate |
| 2027 | $1.9B | $2.1B | $2.2B | 6 | Estimate |
(c) Individual Analyst Price Targets
| Analyst | Firm | Rating | PT | Upside |
|---|---|---|---|---|
| Brennan Hawken | UBS | Hold | $56 | -0.5% |
| Kenneth S. Lee | RBC Capital | Hold | $55 | -2.3% |
| Bill Katz | TD Cowen | Hold | $54 | -4.1% |
| Unknown | Consensus | Hold | $51 | -9.4% |
💡 Investment Thesis
- Record AUM Franchise: $902.6B in AUM represents a dominant franchise, particularly in money markets where Federated Hermes is a top-3 provider. Scale advantages in money market operations create a durable competitive moat with sticky institutional relationships.
- Exceptional Capital Return: FHI returns ~8% annually to shareholders through dividends (2.4%) and buybacks (5.5%). Share count has declined 19% over 4 years (94M to 76M). This aggressive capital return program compounds per-share value even in a flat-revenue environment.
- Valuation Attractive on Earnings: At 11.0x trailing and 10.7x forward P/E, FHI trades at a meaningful discount to asset management peers (T. Rowe at ~14x, Franklin at ~12x). The low multiple partially reflects money market revenue risk, but the buyback program provides a floor on per-share earnings growth.
- Key Risk — Rate Sensitivity: Money market funds (53% of revenue, 76% of AUM) are highly sensitive to interest rates. As the Fed cuts rates, money market yields decline, potentially triggering outflows and fee waivers. FHI waived significant fees during the 2020-2022 zero-rate period. Analysts consensus of Hold reflects this concern.
- Key Risk — Secular Headwinds: Active management faces persistent fee compression from passive investing and ETF growth. While FHI is expanding its ETF/SMA offerings, the transition from higher-fee mutual funds to lower-fee vehicles could pressure revenue per dollar of AUM.
⚖️ DCF Verdict: Hold — Federated Hermes (FHI)
Current price: $56.29 | Analyst Avg PT: $54.20
$32
🔴 Bear
$56
📊 Base
$99
🚀 Bull
| Tier | Price | Action |
|---|---|---|
| Tier 1 — Starter | ≤$51 | Begin position |
| Tier 2 — Add | ≤$44 | Add on weakness |
| Tier 3 — Full | ≤$34 | Full allocation |
| Sell Alert | ≥$84 | Above fair value — consider trimming |
How tiers are set: Tier 1 = Base IV × 0.92 (8% discount to base case). Tier 2 = midpoint of Bear & Base IV (building on meaningful weakness). Tier 3 = Bear IV × 1.05 (just above worst-case — maximum margin of safety). Sell alert = Bull IV × 0.85 (15% discount to bull case — above fair value range).
FHI at $56.29 is a Hold — the stock is trading above analyst consensus PT of $54.20 after a strong run from $35 lows. While the franchise is high-quality (record $903B AUM, 35% ROE, 8% total shareholder yield), current pricing reflects the exceptional FY2025 earnings of $5.13 that benefited from the high-rate environment. As rates normalize, money market revenue (53% of total) faces compression risk, and EPS growth is expected to be flat in FY2026 ($5.15 consensus).
The valuation at 11x earnings is not demanding, but the market is already pricing in the strong capital return program. The Bull case requires sustained AUM inflows and margin expansion that may be difficult to achieve in a declining-rate environment.
Action: Hold at current levels. Accumulate below $48 (Bear case territory). Add aggressively below $42 (below book + terminal earnings). Trim above $60 (Bull territory). Key catalyst to watch: money market AUM trends as rates decline.
🔧 Model Notes & Calibration
| Assumption | Rationale / Notes |
|---|---|
| WACC — Adjusted for AUM Cyclicality | CAPM-derived WACC is 7.7% (Ke=8.2%, Kd=3.6%, 90/10 weights). Adjusted to 9.5% to reflect: (1) AUM is highly sensitive to market returns and fund flows — beta understates cyclicality of earnings, (2) money market revenue (53% of total) faces secular risk from rate cuts, (3) active management secular headwinds from passive investing. A 7.7% WACC produces IV of $75+, far above any analyst estimate — the CAPM rate clearly understates the required return for this business. |
| FCF Base | Used FY2025 actual FCF of $295M. This is below FY2024 ($343M) due to compensation timing and working capital movements. 3-year average is $314M. Conservative base choice reflects uncertainty around money market revenue sustainability. |
| Rate Sensitivity | Money market AUM of $682.6B (76% of total) generates revenue primarily from advisory fees calculated as a % of AUM. In a zero-rate environment (2020-2022), FHI waived significant fees to maintain positive money market fund yields. Current high-rate environment is extremely favorable for money market profitability. Bear case models FCF decline as rates normalize. |
| Buyback Impact | Share count declined from 94M to 76M over 4 years (5%/yr). At current pace, buybacks add ~5% to per-share FCF growth even with flat total FCF. This is captured in the per-share IV calculation (EV ÷ current shares). The aggressive buyback program provides downside protection on per-share metrics. |
Bore Family Office • Analysis generated by Lurch • Not investment advice.