Legg Mason (LM) Q3 Earnings Lag Estimates on High Costs
Legg Mason Inc. LM reported negative earnings surprise of 21.9% in third-quarter fiscal 2017 (ended Dec 31). The company reported net income of 50 cents per share, considerably missing the Zacks Consensus Estimate of 64 cents. Notably, the company recorded loss in the prior-year quarter. Reported quarter results include certain non-recurring items.
Higher expenses were the primary headwinds. However, increase in revenues, higher assets under management (AUM) and steady capital deployment activities remained tailwinds.
Including one-time items, Legg Mason reported net income of $51.4 million compared with a loss of $138.6 million in the prior-year quarter.
Revenues Rise, Expenses Escalate
Legg Mason’s total operating revenue in the quarter came in at $715.2 million, up 8.4% year over year. The rise was mainly due to AUM mix though increased revenues associated with the addition of Clarion and EnTrust, along with higher performance fees. Moreover, revenues outpaced the Zacks Consensus Estimate of $689 million.
Investment advisory fees climbed 10.8% year over year to $623.8 million in the quarter. Further, other revenues increased significantly year over year to $1.25 million. However, distribution and service fees were down 5.9% year over year to $90.2 million.
Operating expenses plunged 33% to $604.1 million on a year-over-year basis. Excluding the non-cash impairment charge of $35.0 million, operating expenses jumped 8% year over year, chiefly due to the addition of expenses of Clarion and Entrust and acquisition and transition-related costs. Moreover, compensation and benefits escalated 15.9% year over year.
Adjusted operating margin of Legg Mason was 23.9%, up from 20.6% in the prior-year quarter.
Solid Assets Position
As of Dec 31, 2016, Legg Mason’s AUM was $710.4 billion, up 6% year over year from $671.5 billion. Of the total AUM, fixed income constituted 54%, equity 24%, liquidity 12% and alternatives represented 10%.
AUM decreased 3.1% sequentially from $732.9 billion as of Sep 30, 2016, driven by outflows of $10.9 billion, negative market performance of $2.3 billion, $8.4 billion in negative foreign exchange and $0.9 billion associated with the sale of Legg Mason Poland.
Additionally, average AUM was $716.7 billion, compared with $742.1 billion in the prior quarter and $683.0 billion in the year-earlier quarter.
Strong Balance Sheet
As of Dec 31, 2016, Legg Mason had $690 million in cash, up from $571 million in the prior quarter. Total debt was $2.2 billion, in line with the preceding quarter. Shareholders’ equity was $4.0 billion, down from $4.1 billion in the previous quarter.
The ratio of total debt to total capital (total equity plus total debt excluding consolidated investment vehicles) was36%, in line withthe prior quarter.
Legg Mason repurchased 3.0 million shares in the reported quarter.
Our Viewpoint
We believe that Legg Mason has the potential to outperform its peers over the long run, on the back of its diversified product mix and leverage in the changing market demography. Further, with strategic acquisitions, restructuring initiatives and cost-cutting measures, we anticipate operating efficiencies to improve. In addition, steady capital deployment activities have been consistently boosting investors’ confidence in the stock. However, escalating expenses remain the primary woe.
Legg Mason, Inc. Price, Consensus and EPS Surprise
Legg Mason, Inc. Price, Consensus and EPS Surprise | Legg Mason, Inc. Quote
Legg Mason currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Competitive Landscape
T. Rowe Price Group, Inc. TROW reported negative earnings surprise of 14.2% for fourth-quarter 2016. Adjusted earnings per share of $1.21 missed the Zacks Consensus Estimate of $1.41. However, the bottom line improved 13.1% from the year-ago earnings of $1.07.
Federated Investors, Inc. FII posted a positive earnings surprise of around 2% for fourth-quarter 2016, marking the seventh straight quarter of an earnings beat. Earnings per share of 52 cents beat the Zacks Consensus Estimate by a penny and also improved 13%, year over year, from 46 cents.
Driven by lower expenses, Franklin Resources Inc. BEN recorded a positive earnings surprise of 13.2% in first-quarter fiscal 2017. The company reported earnings of 77 cents per share, beating the Zacks Consensus Estimate of 68 cents. Moreover, results compared favorably with the prior-year quarter earnings of 74 cents per share.
Zacks’ Best Private Investment Ideas
In addition to the recommendations that are available to the public on our website, how would you like to follow all Zacks' private buys and sells in real time?
Our experts cover all kinds of trades… from value to momentum . . . from stocks under $10 to ETF and option moves . . . from stocks that corporate insiders are buying up to companies that are about to report positive earnings surprises. You can even look inside exclusive portfolios that are normally closed to new investors. Starting today, for the next month, you can have unrestricted access. Click here for Zacks' private trades >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
T. Rowe Price Group, Inc. (TROW): Free Stock Analysis Report
Legg Mason, Inc. (LM): Free Stock Analysis Report
Federated Investors, Inc. (FII): Free Stock Analysis Report
Franklin Resources, Inc. (BEN): Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research
