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Legg Mason (LM) to Report Q4 Earnings: What's in Store?

Zacks Equity Research

Legg Mason LM is scheduled to report fourth-quarter fiscal 2019 (ended Mar 31) results on May 13, after the market closes. Both earnings and revenues are projected to decline year over year.

In the last reported quarter, the company delivered a positive earnings surprise of 5.8%. However, on a year-over-year basis, fall in revenues, resulting from lower investment advisory fees, remained a major drag. Further, elevated expenses and lower assets under management (AUM) were negatives.

Nevertheless, Legg Mason has an impressive earnings surprise history. Its earnings surpassed estimates in three of the trailing four quarters, the average positive surprise being 7.2%.
 

Legg Mason, Inc. Price and EPS Surprise

Legg Mason, Inc. Price and EPS Surprise

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

 

With a stellar earnings record, the company’s price performance seems encouraging. For the three-month period ended Mar 31, 2019, its shares have gained 7.3%.

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

Factors at Play

Strong Markets: Performance of equity markets remained impressive during the January-March quarter. The S&P 500 Index increased nearly 7.3% year over year and 13.1% sequentially in the quarter. Moreover, the index measuring international equity performance — the MSCI EAFE — remained stable year over year and climbed 9.6% sequentially. This is anticipated to likely drive the Baltimore-based asset manager’s results to a large extent.

AUM Might Witness Increase: The asset manager will likely reflect higher AUM on expected overall inflows due to solid markets. Notably, in the first two months of the quarter, the company witnessed equity net inflows, which remains a tailwind.

Revenues Likely to Rise: Higher AUM during the quarter is likely to drive Legg Mason’s performance fees. Non-pass through performance fees are projected at $5-$10 million for the to-be-reported quarter. Also, pass-through performance fees of Clarion are anticipated to add about $10 million to total GAAP revenues.

Costs Might Remain Under Control: With a rise in AUM, distribution and servicing expenses are likely to flare up as well. However, management predicts compensation ratio to remain in the range of 54-56%, underlining lower seasonal compensation impacts.

Here is what our quantitative model predicts:

Our proven model indicates that chances of Legg Mason beating the Zacks Consensus Estimate are high as it 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 +4.41%.

Zacks Rank: The combination of Legg Mason’s Zacks Rank #2 and a positive ESP makes us confident of an earnings beat.

The Zacks Consensus Estimate for the March-end quarter’s earnings remained unchanged over the last seven days, calling for a year-over-year decline of 39.5%.

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