It has been about a month since the last earnings report for Legg Mason (LM). Shares have lost about 0.8% in that time frame, outperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Legg Mason due for a breakout? 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 Q1 Earnings Beat Estimates, Costs Down
Legg Mason delivered a 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 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 $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 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, revenues 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% to $69.9 million. However, other revenues increased 8.3% 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-ended quarter, down from 23% recorded in the prior-year quarter.
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 rose 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.
Management expects fiscal second quarter’s margin to improve due to the combined impacts of additional restructuring savings, lower seasonal comp and one additional day in the quarter.
In second-quarter fiscal 2020, comp ratio is expected to decrease to 54-56%, on account of reduction in seasonal expenses and savings from our strategic restructuring.
In fiscal 2019, Legg Mason initiated a strategic restructuring to reduce costs, which is expected to be substantially complete by the end of fiscal 2021. Restructuring costs include charges for consolidating leased office space and other costs, including professional fees. Legg Mason expects to incur total strategic restructuring costs in the range of $120,000 to $140,000 through March 2021 that are expected to result in future cost savings. Notably, it expects to incur $52 million to $62 million of costs during the remainder of fiscal 2020 and $25 million to $35 million of costs in fiscal 2021.
The company expects tax rate to be in the range of 27% to 28% in second-quarter fiscal 2020.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision flatlined during the past month.
Currently, Legg Mason has a poor Growth Score of F, however its Momentum Score is doing a lot better with an A. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Legg Mason has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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