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What's in the Cards for Legg Mason (LM) in Q2 Earnings?

Zacks Equity Research

Legg Mason LM is scheduled to report second-quarter fiscal 2020 (ended Sep 30) results on Oct 30, after market close. While the company’s earnings are expected to have increased year over year, revenues are likely to have declined.

In the last reported quarter, the company’s earnings surpassed Zacks Consensus Estimate. Higher assets under management (AUM) drove its performance. Further, controlled expenses were a tailwind.

Legg Mason has an impressive earnings surprise history. Its earnings surpassed estimates in three of the trailing four quarters, the average positive surprise being 9.91%.

Legg Mason, Inc. Price and EPS Surprise

Legg Mason, Inc. Price and EPS Surprise

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

Factors at Play

Strong Markets: Performance of equity markets remained impressive during the July-September quarter. The S&P 500 Index rallied nearly 2.2% year over year and 1.2% sequentially in the quarter. Moreover, the index measuring international equity performance — the MSCI EAFE — inched down 1.5% year over year but was up 1.1% sequentially. This might have driven the California-based asset manager’s performance to a large extent.

Higher AUM: Given Legg Mason’s AUM disclosure for September 2019 and favorable foreign-currency fluctuations, its results might display higher AUM on a sequential basis. The Zacks Consensus Estimate for total AUM for the to-be-reported quarter is pegged at $781 million, indicating a slight rise from the prior-quarter reported figure.

Soft Revenue Growth: Investment advisory fees, which constitute a significant portion of the company’s revenues, might have increased slightly in the fiscal second quarter. The consensus estimate for investment management fees from funds indicates a rise of 4.1% on a sequential basis. Performance fees are expected to have risen significantly. However, fees from separate accounts (accounts for nearly 41% of investment advisory fees as of Sep 30, 2019) are likely to have declined slightly. The Zacks Consensus Estimate of $74 million for distribution and service fees suggests 5.7% rise sequentially in the quarter.

Controlled Costs: Legg Mason initiated a strategic restructuring to reduce costs, which is expected to have lent support in fiscal second quarter. Also, management expects comp ratio to decline, on account of reduction in seasonal expenses and savings from its strategic restructuring.

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 0.00%.

Zacks Rank: Legg Mason currently carries a Zacks Rank of 3

The company’s activities in the fiscal second quarter were inadequate to win analysts’ confidence. As a result, the Zacks Consensus Estimate for earnings of 86 cents remained unchanged over the last seven days. The figure implies rise of 6.2% from the year-ago reported figure.However, the Zacks Consensus Estimate for revenues of $732 million indicates a year-over-year fall of 3.5%.

Stocks to Consider

Fidelity National Information Services, Inc. FIS is slated to release results on Nov 5. The company has an Earnings ESP of +0.13% and carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Santander Consumer USA Holdings Inc. SC has an Earnings ESP of +1.01% and holds a Zacks Rank of 3. It is scheduled to report September quarter results on Oct 30.

Cullen/Frost Bankers, Inc. CFR is set to release earnings on Oct 31. The company has an Earnings ESP of +0.07% and currently carries a Zacks Rank of 3.

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