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Legg Mason (LM) Q4 Earnings Beat Estimates, Revenues Down

Zacks Equity Research

Legg Mason Inc. LM reported positive earnings surprise of 32.08% in fourth-quarter fiscal 2019 (ended Mar 31). The company reported adjusted net income of 70 cents per share, outpacing the Zacks Consensus Estimate of 53 cents. However, the reported figure declined 18.6% year over year.

Higher assets under management (AUM) drove the company’s performance. Further, controlled expenses were a tailwind. However, fall in revenues, resulting from lower investment advisory fees was a major drag in the quarter.

Including certain one-time items, Legg Mason reported net income of $49.5 million or 56 cents per share compared with net income of $9.3 million or 10 cents recorded in the year-ago quarter.

Including certain one-time items, for fiscal 2019, net loss came in at $28.5 million or 38 cents per share compared with $285.1 million or $3.01 per share in the prior fiscal.

Revenues Decline, Expenses Down

For fiscal 2019, Legg Mason reported total revenues of $2.9 billion, down 8% year over year, reflecting reduced advisory fee along with distribution and service fee revenues, and lower non-pass through and pass-through performance fees. Revenues almost came in line with the Zacks Consensus Estimate.

Legg Mason’s total adjusted operating revenues in the reported quarter came in at $588.5 million, down 9.8% year over year. The fall mainly resulted from lower non-pass performance fees and reduced average long-term AUM. Further, the revenue figure lagged the Zacks Consensus Estimate of $700 million.

Investment advisory fees slipped 11.9% year over year to $618.9 million in the quarter. Distribution and service fees were down 10.4% year over year to $72.5 million. In addition, other revenues declined 20% year over year to $1.2 million.

Operating expenses declined 10.3% to $614.5 million on a year-over-year basis. This downside chiefly resulted from lower compensation and benefits, distribution and servicing and other costs.

Non-operating expense was $2.8 million, significantly down year over year.

Adjusted operating margin of Legg Mason was 17.1% in the March-end quarter, down from the 23.8% recorded in the prior-year quarter.

Assets Position

As of Mar 31, 2019, Legg Mason’s AUM was $758 billion, slightly up year over year from $754.1 billion. Of the total AUM, fixed income constituted 55%, equity 27%, liquidity 9% and alternatives represented 9%.

Also, AUM ascended 4.2% sequentially from $727.2 billion as of Dec 31, 2018, driven by an encouraging market performance and other of $39.2 billion. These were partly countered by liquidity outflows of $8.1 billion and $0.3 billion in realizations.

Notably, long-term flows included equity outflows of $1 billion, offset by fixed income inflows of $0.1 billion and alternative inflows of $0.9 billion.

Additionally, average AUM was $748.7 billion compared with $766.9 billion witnessed in the year-earlier quarter and $739.3 billion in the previous quarter.

Strong Balance Sheet

As of Mar 31, 2019, Legg Mason had $921.1 million in cash. Total debt was $2.2 billion. Shareholders’ equity came in at $3.7 billion.

The ratio of total debt to total capital (total equity plus total debt excluding consolidated investment vehicles) was 38%, in line with the previous quarter.

Our Viewpoint

We believe Legg Mason has the potential to outperform its peers over the long run, given its diversified product mix and leverage in the changing market demography. In addition to these, with strategic acquisitions, restructuring initiatives and cost-cutting measures, we anticipate the company’s operating efficiencies to improve.

Though declining revenues remain a key concern, prudent expense management and higher AUM remain favorable factors.

Legg Mason, Inc. Price, Consensus and EPS Surprise

Legg Mason, Inc. Price, Consensus and EPS Surprise

Legg Mason, Inc. price-consensus-eps-surprise-chart | Legg Mason, Inc. Quote

Legg Mason currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other Asset Managers

Cohen & Steers’ CNS first-quarter 2019 adjusted earnings came in at 58 cents per share, missing the Zacks Consensus Estimate by a penny. Also, the bottom line came in 6.5% lower than the year-ago quarter figure. Results were adversely impacted by fall in revenues and higher expenses. Nonetheless, improvement in AUM and net inflows acted as tailwinds.

T. Rowe Price Group, Inc. TROW recorded a positive earnings surprise of 14.7% in the January-March quarter. Adjusted earnings per share came in at $1.87, outpacing the Zacks Consensus Estimate of $1.63. Results also improved 7.5% from the year-ago figure of $1.74. Results were driven by higher AUM. However, escalating expenses and lower revenues were a concern.

Blackstone BX reported first-quarter distributable earnings of 44 cents, lagging the Zacks Consensus Estimate of 52 cents. However, the figure indicated improvement from 41 cents earned in the prior-year quarter. Results also reflected higher revenues and growth in AUM. However, higher expenses acted as a headwind.

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