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Legg Mason (LM) to Report Q3 Earnings: What's in Store?

Zacks Equity Research

Legg Mason LM is scheduled to report third-quarter fiscal 2019 (ended Dec 31) results on Feb 4, after the market closes. Both earnings and revenues are projected to decline year over year.

In the last reported quarter, the company reported a negative earnings surprise of 2.4%. Fall in revenues, resulting from lower investment advisory fees, remains a major drag. However, controlled expenses and higher assets under management (AUM) were positives.

Yet, Legg Mason boasts an impressive earnings surprise history. Its earnings have surpassed estimates in three of the trailing four quarters, average positive surprise being 10.81%.

Legg Mason, Inc. Price and EPS Surprise

Legg Mason, Inc. Price and EPS Surprise | Legg Mason, Inc. Quote

Despite an impressive earnings record, the company’s price performance does not seem encouraging. For the three-month period ended Dec 31, 2018, its shares have lost 18.2% compared with the 19.2% decline recorded by the industry.

Now, before we take a look at what our quantitative model predicts, let’s discuss the factors that are likely to impact fiscal third-quarter results.

Factors at Play

Weak Markets: Performance of equity markets remained unimpressive during the Oct-Dec quarter. The S&P 500 Index declined nearly 6.2% year over year and 14% sequentially in the quarter. Moreover, the index measuring international equity performance — the MSCI EAFE — decreased 13.4% year over year and 12.5% sequentially. This is anticipated to likely impact the Baltimore-based asset manager to a large extent.

AUM Might Witness Fall: The asset manager is expected to reflect lower AUM as uncertainty, mainly related to escalating trade-war fears in the to-be-reported quarter, failed to significantly boost client activity. Notably, in the last two months of the quarter, the company witnessed fixed income and equity net outflows, which remains a headwind.

Revenues Likely to Decline: Lower AUM during the quarter is likely to weigh on Legg Mason’s performance fees as well. Overall, the Zacks Consensus Estimate for revenues of $717.5 million indicates a year-over-year fall of 9.5%

Costs Might Remain Under Control: With a decline in AUM, distribution and servicing expenses are likely to be down as well. Further, management predicts compensation ratio to remain in the range of 53-55%, highlighting lower seasonal impacts.

Here is what our quantitative model predicts:

Our proven model indicates that chances of Legg Mason beating the Zacks Consensus Estimate are low as it does not has the right combination of the two key ingredients — positive Earnings ESP, and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold).

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for Legg Mason is currently pegged at 0.00%.

Zacks Rank: Legg Mason’s Zacks Rank of 5 (Strong Sell) decreases the predictive power of ESP.

It should be noted that we caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

The Zacks Consensus Estimate for the Oct-Dec quarter’s earnings remained unchanged over the last seven days, calling for year-over-year decline of 31.7%.

Stocks That Warrant a Look

Here are some stocks you may want to consider, as according to our model these have the right combination of elements to post an earnings beat this quarter.

Apollo Investment Corporation AINV is slated to release results on Feb 6. The company has an Earnings ESP of +0.72% and carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Ares Capital Corporation ARCC is scheduled to report earnings on Feb 12. It has an Earnings ESP of +1.10% and carries a Zacks Rank #3.

Garrison Capital Inc. GARS has an Earnings ESP of +11.94% and has a Zacks Rank #2. It is set to release quarterly numbers on Mar 5.

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