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Legg Mason's (LM) Q1 Earnings Beat Estimates, Costs Down

Zacks Equity Research

Legg Mason Inc. LM reported positive earnings surprise of 4.17% in first-quarter fiscal 2020 (ended Jun 30). The company reported adjusted net income of 75 cents per share, outpacing the Zacks Consensus Estimate of 72 cents. However, the reported figure declined 6.3% year over year.

Higher assets under management (AUM) drove the company’s performance. Further, controlled expenses were a tailwind. Nonetheless, 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 $45.4 million or 51 cents per share compared with net income of $66.1 million or 75 cents recorded in the year-ago quarter.

Revenues Decline, Expenses Drop

Legg Mason’s total adjusted operating revenues in the reported quarter came in at $705.4 million, down 6% year over year. The fall mainly resulted from both lower non-pass and pass through performance fees, along with lower fund advisory fee revenues. In addition, the revenue figure lagged the Zacks Consensus Estimate of $708 million.

Investment advisory fees slipped 5% year over year to $634.1 million in the quarter. Distribution and service fees were down 11.7% year over year to $69.9 million. However, other revenues increased 8.3% year over year to $1.3 million.

Operating expenses declined slightly to $621.4 million on a year-over-year basis. This downside chiefly resulted from lower compensation and benefits, distribution and other costs.

Non-operating expense was $4.3 million, significantly down year over year.

Adjusted operating margin of Legg Mason was 21.6% in the June-end quarter, down from the 23% recorded in the prior-year quarter.

Assets Position

As of Jun 30, 2019, Legg Mason’s AUM was $780.2 billion, up 4.8% year over year from $744.6 billion. Of the total AUM, fixed income constituted 56%, equity 26%, liquidity 9% and alternatives represented 9%.

Also, AUM ascended 2.9% sequentially from the $758 billion as of Mar 31, 2019, driven by an encouraging market performance and other of $21.9 billion, along with positive foreign exchange of $0.6 billion, acquired AUM of $0.6 billion and long-term inflows of $1.1 billion. These were partly countered by liquidity outflows of $1.6 billion and $0.4 billion in realizations.

Notably, long-term flows included equity outflows of $3.6 billion, offset by fixed income inflows of $3.9 billion and alternative inflows of $0.8 billion.

Additionally, average AUM was $765.9 billion compared with $749.5 billion witnessed in the year-earlier quarter and $748.7 billion in the previous quarter.

Strong Balance Sheet

As of Jun 30, 2019, Legg Mason had $643.6 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 the company’s 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 is a key concern, prudent expense management and higher AUM remain driving 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

Franklin Resources Inc. BEN reported a positive earnings surprise of 3.2% in third-quarter fiscal 2019 (ended Jun 30). Adjusted earnings of 65 cents per share outpaced the Zacks Consensus Estimate of 63 cents. Results, however, compared unfavorably with earnings of 75 cents per share recorded in the prior-year quarter.

T. Rowe Price Group, Inc. TROW delivered a positive earnings surprise of 6.3% in second-quarter 2019. Adjusted earnings per share came in at $2.03, outpacing the Zacks Consensus Estimate of $1.91. Results also improved 14.7% from the year-ago figure of $1.77.

Blackstone BX posted second-quarter distributable earnings of 57 cents, beating the Zacks Consensus Estimate of 50 cents. Moreover, the figure reflected improvement from 56 cents earned in the prior-year quarter. Results benefited from growth in AUM and lower expenses. However, a decline in revenues acted as a headwind.

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