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Will Strong Equity Markets Drive Legg Mason (LM) Q1 Earnings?

Zacks Equity Research

Legg Mason LM is scheduled to report first-quarter fiscal 2020 (ended Jun 30) results on Aug 1, 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 32.08%. 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.

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 9.51%.

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 Jun 30, 2019, its shares have gained 36.4%.

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

Factors at Play

Strong Markets: Performance of equity markets remained impressive during the April-June quarter. The S&P 500 Index gained nearly 8.2% year over year and 3.8% sequentially in the quarter. Moreover, the index measuring international equity performance — the MSCI EAFE — inched up 0.8% year over year but down 1.6% 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 quarter, the company witnessed fixed income net inflows, which is a tailwind.

Per the Zacks Consensus Estimate, total AUM for the to-be-reported quarter will be up 1.8% to $772 million sequentially.

Revenues Likely to Rise: Investment management fees, which mark a significant portion of the company’s revenues, might reflect a rise in the fiscal first quarter. The consensus estimate for investment management fees of $646 million indicates nearly 4.5% sequential increase. Furthermore, distribution and service fees are projected to be up 1.4% sequentially to $74 million in the quarter. However, other revenues are estimated to be down 25.6% sequentially.

Overall, the Zacks Consensus Estimate for revenues of $708 million indicates a year-over-year fall of 5.3%.

Costs Might Upsurge: With a rise in AUM, distribution and servicing expenses are likely to flare up as well. Moreover, management predicts compensation ratio to increase to 56%, on a sequential basis, reflecting a rise in seasonal expenses related to its annual compensation cycle.

Here is what our quantitative model predicts:

Legg Mason does have the right combination of the two key ingredients— positive Earnings ESP and a Zacks Rank #3 (Hold) or better — to increase the odds of an earnings beat.

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 -0.14%.

Zacks Rank: Legg Mason currently carries a Zacks Rank of 2, which increases the predictive power of ESP. But we also need to have a positive ESP to be confident of a positive earnings surprise

The Zacks Consensus Estimate for the June-end quarter’s earnings remained unchanged over the last seven days, calling for a year-over-year decline of 10%.

Stocks to Consider

T. Rowe Price Group, Inc. TROW has been witnessing upward estimate revisions, for the past 30 days. Moreover, this Zacks #1 Ranked stock has rallied more than 8%, in the past three months. You can see the complete list of today’s Zacks #1 Rank stocks here.

Artisan Partners Asset Management Inc. APAM has been witnessing upward estimate revisions, for the past 30 days. Also, the company’s shares have gained nearly 4.4% in three months’ time. At present, it carries a Zacks Rank of 2.

Federated Investors, Inc. FII has been witnessing upward estimate revisions for the past 30 days. Additionally, the stock has jumped around 11.6% over the past three months. It currently carries a Zacks Rank #2.

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