Can Higher Assets Support Legg Mason's (LM) Q3 Earnings?

Legg Mason (NYSE:LM) is scheduled to report third-quarter fiscal 2020 (ended Dec 31) results on Jan 29, after market close. The company’s earnings and revenues are expected to have increased year over year .

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 each of the trailing four quarters, the positive surprise being 13.1%, on average.

Legg Mason, Inc. Price and EPS Surprise

Factors at Play

Strong Markets: Performance of equity markets was impressive during the October-December quarter. The S&P 500 Index rallied 9.9% in the quarter. Moreover, the index measuring international equity performance — the MSCI EAFE — delivered net returns of 8.2% in the fourth quarter. This might have driven the California-based asset manager’s performance to a large extent.

Higher AUM: Per the monthly metrics data published by Legg Mason, preliminary total AUM as of Dec 31, 2019, was $803.5 billion, up 2.8% from Sep 30, 2019 level. The rise seems to be majorly due to net inflows in fixed income and favorable foreign-currency fluctuations. Hence, performance fees and investment management fees are likely to have recorded growth in the quarter.

Soft Revenue Growth: Investment advisory fees, which constitute a significant portion of the company’s revenues, might have increased slightly in the fiscal third quarter. The consensus estimate for investment management fees from funds indicates a rise of 4% from the prior-quarter reported number. Also, fees from separate accounts (totaled nearly 40% of investment advisory fees as of Sep 30, 2019) are likely to have risen slightly. The Zacks Consensus Estimate of $69 million for distribution and service fees suggests 3% rise sequentially in the quarter.

Controlled Costs: Legg Mason initiated a strategic restructuring to reduce costs, which is expected to have lent support in the fiscal third 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 has 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 +1.59%.

Zacks Rank: Legg Mason currently carries a Zacks Rank of 2 (Buy).

The company’s activities in the fiscal third quarter were adequate to win analysts’ confidence. As a result, the Zacks Consensus Estimate for earnings of 95 cents was revised upward over the last 30 days. Moreover, the figure implies rise of 30.1% from the year-ago reported figure. Also, the consensus estimate for revenues of $732.2 million indicates growth of 4%.

Other Stocks to Consider

Principal Financial Group, Inc. (NASDAQ:PFG) is slated to release results on Jan 28. The company has an Earnings ESP of +0.76% and carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

T. Rowe Price Group, Inc. (NASDAQ:TROW) has an Earnings ESP of +1.47% and holds a Zacks Rank of 2. It is scheduled to report December-quarter results on Jan 29.

Invesco Ltd. (NYSE:IVZ) is set to release earnings on Jan 29. The company has an Earnings ESP of +1.39% and currently carries a Zacks Rank of 2.

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