Zacks_Analysts' Blog : Legg Mason Outshines Estimate - Analyst Blog

Legg Mason Inc.’s (LM) fiscal third-quarter 2012 earnings of 55 cents per share significantly outpaced the Zacks Consensus Estimate of 27 cents. However, earnings were below the prior quarter and prior-year quarter’s earnings of 61 cents and 73 cents per share.

Results declined on a year over year basis, due to lower revenue and reduced assets under management (AUM), partially offset by lower operating expenses. Sequentially, AUM improved, though offset by reduced total revenues and increased operating expenses.

Adjusted net income came in at $76.8 million compared with $87.6 million in the prior quarter and $110.3 million in the year-ago quarter. Including one-time expenses of $42.3 million related to transition costs, net income came in at $28.1 million or 20 cents per share.

Performance in Detail

During the reported quarter, Legg Mason’s total revenue was $627 million, down 6% sequentially and 13% year over year (y/y) due to decreased average AUM, including a less favorable average asset mix and lower performance fees. Moreover, revenues were also below the Zacks Consensus Estimate of $662.0 million.

Investment Advisory fees inched down 6.4% sequentially and 12.8% y/y to $545.3 million. Distribution and Service fees dropped 5.9% sequentially and 15.5% year over year to $80.7 million. Other revenues were down 23.1% both sequentially and y/y to $1.0 million.



Adjusted operating margin of Legg Mason improved to 21.7% in the reported quarter from 21.3% in the prior quarter but declined from 24.3% in the prior-year quarter.

Operating expenses increased 1% sequentially to $567.7 million, attributed to transition-related costs recorded in the quarter. However, expenses plummeted 9% y/y, mainly due to lower compensation under revenue share arrangements from reduced revenues, and quarterly savings associated with the company’s streamlining program. These savings were partly offset by increased transition-related costs.



As of December 31, 2011, Legg Mason’s AUM was $627.0 billion, up 2.5% sequentially from $611.8 billion, driven by market appreciation, partially offset by net client outflows of $1.3 billion and dispositions of $1.1 billion. On a year-over-year basis, AUM was down 7% from $671.8 billion. Fixed income represented 56% of consolidated AUM as of December 31, 2011, liquidity represented 19% and equity comprised 25%.



During the quarter, fixed income outflows were approximately $7.1 billion and equity outflows were $4.9 billion. However, liquidity inflows were $10.7 billion. Besides, average AUM was $622 billion, down 3.3% from $643.3 billion in the prior quarter and 7.5% from $672.4 billion in the year-ago quarter.

As of December 31, 2011, Legg Mason had approximately $1.2 billion in cash compared with $1.1 billion in the prior quarter, while total debt was stable at $1.4 billion, in line with the prior quarter. Shareholders’ equity was $5.6 billion, unchanged from the prior quarter. The ratio of total debt to total capital (total equity plus total debt excluding consolidated investment vehicles) was 20%, stable compared with the previous quarter.

Dividend Update



Legg Mason’s board declared a quarterly cash dividend of 8 cents per share on its common stock. The dividend will be paid on April 16, 2012 to shareholders of record as of March 15, 2012.

Peer Performance

In Legg Mason’s peer group, T. Rowe Price Group Inc.’s (TROW) fourth-quarter 2011 net income of 73 cents per share were above the Zacks Consensus Estimate by 4 cents. Moreover, earnings compared favorably to 72 cents reported in the prior-year quarter.

Higher-than-expected top-line growth, partially offset by higher operating expenses, cumulated in improved performance. Moreover, increased assets under management (AUM) were also positive for the quarter.

Our Take

We believe Legg Mason has the potential to outperform its peers in the long run, given its diversified product mix and leverage to the changing demographics in the market. However, in the near term, assets outflows will remain a significant headwind. Yet, with the restructuring initiatives and the cost-cutting measures, we expect operating leverage to improve, and dividend payments to continue inspiring investors’ confidence on the stock.

Legg Mason currently retains its Zacks #3 Rank, which translates to a short-term Hold rating. Considering the fundamentals, we also maintain a Neutral recommendation on the stock.