Legg Mason's Earnings Lag
Legg Mason Inc.’s (LM) fiscal fourth-quarter 2013 adjusted earnings came in at 52 cents per share lagging the Zacks Consensus Estimate by 6 cents. Moreover, this came well below the year-ago figure of 88 cents per share.
Lower-than-expected results reflect higher operating expenses. Moreover, net client outflows in the quarter were a negative. However, growth in top line, aided primarily by improved investment advisory fees and other revenues was a tailwind.
Adjusted net income came in at $66.7 million compared with $123.6 million in the prior-year quarter. Including one-time items, Legg Mason reported net income of $29.2 million or 23 cents per share as compared with $76.1 million or 54 cents in the year-ago quarter.
For fiscal 2013, adjusted net income came in at $347.2 million or $2.61 per share compared with $397.0 million or $2.77 per share in the prior year. This also lagged the Zacks Consensus Estimate by 12 cents.
Including one-time items, Legg Mason reported net loss of $353.3 million or $2.65 per share versus net income of $220.8 million or $1.54 per share in the prior year.
Performance in Detail
Legg Mason’s total revenue came in at $667.8 million for the quarter under review, up 3% year over year, driven by higher performance fees. Moreover, revenues surpassed the Zacks Consensus Estimate of $644.0 million.
For fiscal 2013, Legg Mason reported total revenue of $2.6 billion, down 2% year over year, reflecting a less favorable AUM mix. Revenues were in line with the Zacks Consensus Estimate.
Investment Advisory fees climbed 3% year over year to $581.9 million. Distribution and Service fees elevated 1.8% to $83.9 million. Moreover, other revenues were up 33.3% year over year to $2.0 million.
Operating expenses increased 8.4% to $624.8 million on a year-over-year basis. The rise was primarily driven by higher compensation and benefit expenses and elevated occupancy expenses. Adjusted operating margin of Legg Mason declined to 9.7% in the quarter under review from 21.2% in the prior-year quarter.
Assets Position
As of Mar 31, 2013, Legg Mason’s assets under management (:AUM) were $664.6 billion, up 3.0% year over year from $643.3 billion, driven by market appreciation of $34.2 billion. Fixed income represented 55% of consolidated AUM as of Mar 31, 2013, liquidity represented 21% and equity comprised 24%.
During the quarter, liquidity inflows were about $1.2 billion. However, equity and fixed income outflows were $2.6 billion and $0.4 billion, respectively. Besides, average AUM was $657.4 billion compared with $634.9 billion in the prior-year quarter.
Balance Sheet
As of Mar 31, 2013, Legg Mason had approximately $0.9 billion in cash, in line with the prior quarter, while total debt stood at $1.1 billion, also in line with the prior quarter. Shareholders’ equity decreased to $4.8 billion from $4.9 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
During fiscal year 2013, Legg Mason repurchased 3.7 million shares.
In Apr 2013, Legg Mason’s board declared an increased quarterly cash dividend of 13 cents per share, reflecting an 18% hike from the prior dividend of 11 cents. The dividend will be paid on Jul 8, 2013 to shareholders of record as of Jun 11, 2013.
Our Viewpoint
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 market demography. 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 efficiencies to improve, and dividend payments to continue to inspire investors’ confidence in the stock.
Shares of Legg Mason currently carry a Zacks Rank #3 (Hold). Among other investment managers, Virtus Investment Partners, Inc. (VRTS) and Waddell & Reed Financial Inc. (WDR) carry a Zacks Rank #1 (Strong Buy), while BlackRock, Inc. (BLK) carries a Zacks Rank #2 (Buy).
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