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Why Is Legg Mason (LM) Up 8.2% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for Legg Mason (LM). Shares have added about 8.2% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Legg Mason due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Legg Mason Q4 Earnings Beat Estimates, Revenues Down

Legg Mason delivered a positive earnings surprise of 32.08% in fourth-quarter fiscal 2019 (ended Mar 31). The company reported adjusted net income of 70 cents per share, outpacing the Zacks Consensus Estimate of 53 cents. However, the figure declined 18.6% year over year.

Higher 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.

Including certain one-time items, Legg Mason reported net income of $49.5 million or 56 cents per share compared with net income of $9.3 million or 10 cents recorded in the year-ago quarter.

Including certain one-time items, for fiscal 2019, net loss was $28.5 million or 38 cents per share compared with $285.1 million or $3.01 per share in the prior fiscal.

Revenues Decline, Expenses Down

For fiscal 2019, Legg Mason reported total revenues of $2.9 billion, down 8% year over year, reflecting reduced advisory fee along with distribution and service fee revenues, and lower non-pass through and pass-through performance fees. Revenues almost came in line with the Zacks Consensus Estimate.

Legg Mason’s total adjusted operating revenues in the reported quarter came in at $588.5 million, down 9.8% year over year. The fall mainly resulted from lower non-pass performance fees and reduced average long-term AUM. Further, the revenue figure lagged the Zacks Consensus Estimate of $700 million.

Investment advisory fees slipped 11.9% year over year to $618.9 million in the quarter. Distribution and service fees were down 10.4% to $72.5 million. In addition, other revenues declined 20% to $1.2 million.

Operating expenses declined 10.3% to $614.5 million on a year-over-year basis. This downside chiefly resulted from lower compensation and benefits, distribution and servicing and other costs.

Non-operating expense was $2.8 million, significantly down year over year.

Adjusted operating margin of Legg Mason was 17.1% in the March-ended quarter, down from the 23.8% recorded in the prior-year quarter.

Assets Position

As of Mar 31, 2019, Legg Mason’s AUM was $758 billion, slightly up year over year from $754.1 billion. Of the total AUM, fixed income constituted 55%, equity 27%, liquidity 9% and alternatives represented 9%.

Also, AUM jumped 4.2% sequentially from $727.2 billion as of Dec 31, 2018, driven by an encouraging market performance and other of $39.2 billion. These were partly countered by liquidity outflows of $8.1 billion and $0.3 billion in realizations.

Notably, long-term flows included equity outflows of $1 billion, offset by fixed income inflows of $0.1 billion and alternative inflows of $0.9 billion.

Additionally, average AUM was $748.7 billion compared with $766.9 billion witnessed in the year-earlier quarter and $739.3 billion in the previous quarter.

Strong Balance Sheet

As of Mar 31, 2019, Legg Mason had $921.1 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.

Outlook

Management expects first quarter’s margin, excluding the strategic restructuring cost but including expected sales, to improve the increased revenues from higher average AUM, more than offsetting the impact of higher seasonal comp.

In first-quarter fiscal 2020, comp ratio is expected to increase to 56%, on a sequential basis, reflecting a typical pick up in seasonal expenses related to its annual compensation cycle.

The company believes cash tax rate to be in the single digits until approximately fiscal 2024.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

Currently, Legg Mason has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Legg Mason has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.



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