Legg Mason Inc. LM reported positive earnings surprise of 18.6% in fourth-quarter fiscal 2019 (ended Mar 31). The company reported adjusted net income of $1.02 per share, outpacing the Zacks Consensus Estimate of 86 cents. Also, the reported figure surged 52.2% year over year.
Higher revenues resulting from elevated investment advisory fees aided the company’s performance. Further, controlled expenses were a tailwind. However, a fall in assets under management (AUM) was a major drag during the quarter.
Including certain one-time items, Legg Mason reported net income of $64.2 million or 70 cents per share compared with the net income of $49.5 million or 56 cents recorded in the year-ago period.
Including certain one-time items, for fiscal 2020, net income came in at $251.4 million or $2.79 per share as against the net loss of $28.5 million or 38 cents per share reported in the prior fiscal year.
Revenues Climb, Expenses Down
For fiscal 2020, Legg Mason reported total revenues of $2.92 billion, marginally up year over year, reflecting higher advisory and non-pass through performance fee, partly offset by lower pass-through performance fees. Revenues came in line with the Zacks Consensus Estimate.
Legg Mason’s total operating revenues in the January-March quarter came in at $719.6 million, up 4% year over year. This upswing mainly resulted from higher advisory and pass-through performance fees, partly muted by lower non-pass performance fees.
Investment advisory fees climbed 5.3% year over year to $651.9 million during the quarter. In addition, other revenues surged 66.7% year over year to $2 million. However, distribution and service fees were down 9.2% year over year to $65.8 million.
Operating expenses declined 10% to $553.3 million on a year-over-year basis. This downside chiefly resulted from lower compensation and benefits, occupancy and other expenses, partly offset by rise in communications and technology expenses.
Non-operating expense was $65.3 million, significantly up year over year.
Adjusted operating margin of Legg Mason was 25.8% in the March-end quarter, up from the 20.4% recorded in the prior-year period.
As of Mar 31, 2020, Legg Mason’s AUM was $730.8 billion, down 3.6% year over year from $758 billion. Of the total AUM, fixed income constituted 58%, equity 22%, liquidity 10% and alternatives represented 10%.
Also, AUM descended 9% sequentially from $803.5 billion as of Dec 31, 2019, impacted by a negative market performance and other, long-term outflows of $12.1 billion, negative foreign exchange of $7.8 billion and realizations of $0.2 billion. These were partly countered by liquidity inflows of $11.6 billion.
Notably, long-term flows included equity outflows of $6 billion and fixed-income outflows of $8.4 billion, partly negated by alternative inflows of $2.3 billion.
Additionally, average AUM was $782.4 billion compared with the $748.7 billion witnessed in the year-earlier period and $791.7 billion in the previous quarter.
Strong Balance Sheet
As of Mar 31, 2020, Legg Mason had $1 billion in cash. Total debt was $2 billion. Shareholders’ equity came in at $3.8 billion.
The ratio of total debt to total capital (total equity plus total debt excluding consolidated investment vehicles) was 35%, up from the previous quarter’s 34%.
We believe Legg Mason has the potential to outperform its peers over the long run, given the bank’s diversified product mix and leverage in the changing market demography. In addition to these, we anticipate the company’s operating efficiencies to improve on its strategic acquisitions, restructuring initiatives and cost-cutting measures.
Though a declining AUM is a key concern, prudent expense management and higher revenues are favorable factors.
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 #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Performance of Other Asset Managers
Invesco IVZ reported first-quarter 2020 adjusted earnings of 34 cents per share, missing the Zacks Consensus Estimate of 56 cents. Also, the bottom line plummeted 39.3% from the prior-year quarter. Escalating operating expenses and net outflows were the major headwinds amid the coronavirus scare. Nevertheless, a rise in the AUM balance and higher revenues — driven by the OppenheimerFunds buyout — were the supporting factors.
Cohen & Steers’ CNS adjusted earnings of 61 cents per share missed the Zacks Consensus Estimate of 66 cents in the first quarter. However, the bottom line came in 5.2% higher than the year-ago reported figure. Rise in expenses and fall in AUM balance were the major headwinds. Yet, improvement in revenues and modest asset inflows offered some support.
T. Rowe Price TROW delivered first-quarter 2020 adjusted earnings per share of $1.87, which outpaced the Zacks Consensus Estimate of $1.85. The reported figure came in line with the year-ago quarter’s reported tally. Results were aided by higher revenues on solid growth in investment advisory fees. Nonetheless, escalating expenses were an undermining factor. Also, the AUM declined year over year.
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