Legg Mason Beats on Fiscal Q3 Earnings


Legg Mason Inc.’s (LM) fiscal third-quarter 2014 adjusted earnings came in at $1.03 per share, beating the Zacks Consensus Estimate by 3 cents. Moreover, this came significantly above the year-ago figure of 70 cents per share.

Despite negative market sentiment, shares of Legg Mason gained more than 1% in the pre-market session, indicating that investors have been bullish on the results. The price reaction during the trading session will give a better idea about whether Legg Mason has been able to meet expectations.

Better-than-expected results were due to top-line growth. Further, increased assets under management (:AUM) were a positive. However, upsurge in expenses reflected undisciplined expense management.

Adjusted net income came in at $124.6 million, compared with $91.8 million in the prior-year quarter. Including one-time items, Legg Mason reported net income of $81.7 million or 67 cents per share, compared with a net loss of $453.9 million or $3.45 in the prior-year quarter.

Performance in Detail

Legg Mason’s total revenue came in at $720.1 million, up 7% year over year. The rise was due to an increase in average equity AUM and higher performance fees. Moreover, revenues surpassed the Zacks Consensus Estimate of $716.0 million.

Investment Advisory fees climbed 6.8% year over year to $629 million. Distribution and Service fees rose 6.3% to $88.3 million. Moreover, other revenues were up 50% year over year to $2.7 million.

Operating expenses rose 4% to $598.4 million on a year-over-year basis. Notably, the prior-year quarter excludes non-cash impairment charge of $734.0 million. The rise was primarily due to increased distribution and servicing related expenses along with higher compensation and benefits.

Adjusted operating margin of Legg Mason was 24.1%, up from 20.4% in the prior-year quarter.

Assets Position

As of Dec 31, 2013, Legg Mason’s AUM was $679.5 billion, up 5% year over year from $648.9 billion.  Of the total AUM, fixed income constituted 52%, liquidity 21% and equity 27%.

Equity outflows were $700 million, while fixed income and liquidity inflows were $700 million and $9.9 billion, respectively for the quarter ended Dec 31, 2013. Additionally, average AUM was $670 billion, compared with $648.3 billion in the prior-year quarter.

Balance Sheet

As of Dec 31, 2013, Legg Mason had approximately $805 million in cash, up from $712 million in the prior quarter, while total debt was $1.1 billion, in line with the prior-quarter amount. Shareholders’ equity decreased to $4.7 billion from $4.8 billion in the prior quarter.

The ratio of total debt to total capital (total equity plus total debt excluding consolidated investment vehicles) was 19%, in line with the prior quarter.

Capital Deployment Update

Concurrent with the earnings release, Legg Mason’s board of directors declared a quarterly cash dividend of 13 cents per share. The dividend will be paid on Apr 14, 2014 to shareholders of record as of Mar 13, 2014. Moreover, the company repurchased 2.3 million shares in the said quarter.

Competitive Landscape

Among other investment managers, Janus Capital Group Inc. (JNS), BlackRock, Inc. (BLK) and T. Rowe Price Group, Inc.’s (TROW) December-quarter end earnings beat the Zacks Consensus Estimate.

Our Viewpoint

We believe Legg Mason has the potential to outperform its peers in the long run, given its diversified product mix and leverage in the changing market demography. However, asset outflows will remain a significant headwind in the near term.

Nevertheless, with restructuring initiatives and cost-cutting measures, we expect operating efficiencies to improve and dividend payments to continue to boost investors’ confidence in the stock. Legg Mason currently carries a Zacks Rank #2 (Buy).

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