A month has gone by since the last earnings report for Legg Mason (LM). Shares have lost about 3.9% in that time frame, underperforming 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 catalysts.
Legg Mason Q3 Earnings Beat Estimates, Revenues Down Y/Y
Legg Mason reported positive earnings surprise of 5.8% in third-quarter fiscal 2019 (ended Dec 31). The company reported adjusted net income of 73 cents per share, outpacing the Zacks Consensus Estimate of 69 cents. However, the reported figure declined 27.7% year over year.
Fall in revenues, due to lower investment advisory fees impacted the results. Also, higher expenses were reflected in the quarter. Moreover, lower assets under management (AUM) were recorded.
Including certain one-time items, Legg Mason reported net loss of $216.9 million or $2.55 per share compared with net income of $149.2 million or $1.58 recorded in the year-ago quarter.
Revenues Decline, Expenses Escalate
Legg Mason’s total operating revenues in the reported quarter came in at $704.3 million, down 11.2% 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 $717.5 million.
Investment advisory fees slipped 11.2% year over year to $630.5 million in the quarter. Distribution and service fees were down 11.4% year over year to $72.2 million. Nonetheless, other revenues climbed 6.3% year over year to $1.7 million.
Operating expenses rose 15% to $940.7 million on a year-over-year basis. This upsurge can chiefly be attributed to higher impairment of intangible assets expenses and other costs.
Non-operating expense was $30.3 million, significantly rising year over year.
Adjusted operating margin of Legg Mason was 21.1% in the Dec-end quarter, down from 27.2% recorded in the prior-year quarter.
As of Dec 31, 2018, Legg Mason’s AUM was $727.2 billion, down 5.2% year over year from $754.4 billion. Of the total AUM, fixed income constituted 56%, equity 25%, liquidity 10% and alternatives represented 9%.
Further, AUM descended 3.7% sequentially from $755.4 billion as of Sep 30, 2018, impacted by a negative market performance and other of $30 billion, long-term outflows of $8.5 billion and $0.2 billion in realizations. These were partly countered by liquidity inflows of $10.5 billion.
Notably, long-term net outflows of $8.5 billion included equity outflows of $3.3 billion, fixed income outflows of $5.1 billion and alternative outflows of $0.1 billion.
Additionally, average AUM was $739.3 billion compared with $759.9 billion witnessed in the prior-year quarter, and $750.2 billion in the previous quarter.
Strong Balance Sheet
As of Dec 31, 2018, Legg Mason had $835.2 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%, up from 37% witnessed in the prior quarter.
Fourth-Quarter Fiscal 2019
Non-pass through performance fees are projected to be $5-$10 million for fourth-quarter fiscal 2019. Also, pass-through performance fees of Clarion are anticipated to add about $10 million to total GAAP revenues.
The company expects the comp ratio to be in the range of 54-56%, underlining lower seasonal compensation impacts.
Management expects to incur global operating platform costs of $9 million to $11 million, about $3 million in occupancy expenses and $7 million in other expenses.
Operating margin is expected to decline on account of the impact of seasonal comp increases as well as the increase in global operating platform costs.
For fiscal 2019, management expects effective tax rate to be 27%. Additionally, cash tax rate is expected to be 7% in fiscal 2019 and remain below 10% until fiscal 2024.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -23.39% due to these changes.
Currently, Legg Mason has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. Charting a somewhat similar path, 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 A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, 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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