Legg Mason (LM) Q2 Earnings And Revenues Beat Estimates

Legg Mason Inc. (NYSE:LM) reported positive earnings surprise of 16.2% in second-quarter fiscal 2018 (ended Sep 30). The company reported adjusted net income of 79 cents per share, considerably beating the Zacks Consensus Estimate of 68 cents. Further, earnings surged 29.5% from the prior-year quarter.

Top-line strength and steady assets under management (AUM) were the tailwinds. However, rise in expenses and net outflows remain a concern.

Including one-time items, Legg Mason reported net income of $75.7 million or 78 cents per share compared with $66.4 million or 63 cents recorded in the year-ago quarter.

Revenues Rise, Expenses Flare Up

Legg Mason’s total operating revenues in the quarter came in at $768.3 million, up 3% year over year. The upsurge was mainly due to elevated average long term AUM and non-pass performance fees, partially mitigated by reduction in pass through performance fees. In addition, revenues outpaced the Zacks Consensus Estimate of $739.1 million.

Investment advisory fees increased 5.3% year over year to $686.9 million in the quarter. However, other revenues plummeted 52.6% year over year to $0.7 million. Furthermore, distribution and service fees were down 14.6% year over year to $80.7 million.

Operating expenses inched up 1% to $623.9 million on a year-over-year basis. The rise was chiefly due to higher other expenses, partially offset by lower compensation and benefits expenses, distribution and servicing costs, and occupancy expenses.

Adjusted operating margin of Legg Mason was 24.9%, up from 22.7% recorded in the prior-year quarter.

Solid Assets Position

As of Sep 30, 2017, Legg Mason’s AUM was $754.4 billion, up 2.9% year over year from $732.9 billion. Of the total AUM, fixed income constituted 54%, equity 27%, liquidity 10% and alternatives represented 9%.

AUM inched up 1.8% sequentially from $741.2 billion as of Jun 30, 2017, driven by upbeat market performance and other of $12.5 billion, liquidity inflows of $0.2 billion and $2.2 billion in positive foreign exchange. These positives were partially offset by long-term outflows of $1.2 billion.

Notably, long-term net outflows of $1.2 billion included equity outflows of $2 billion and alternative outflows of $0.7 billion, partially mitigated by fixed income inflows of $1.5 billion. Additionally, average AUM was $750.3 billion compared with $742.1 billion witnessed in the prior-year quarter and $740.3 billion in the prior quarter.

Strong Balance Sheet

As of Sep 30, 2017, Legg Mason had $654 million in cash. Total debt was $2.2 billion, while shareholders’ equity came in at $4 billion.

The ratio of total debt to total capital (total equity plus total debt excluding consolidated investment vehicles) was 36%, in line with the prior quarter.

Capital Deployment Update

Legg Mason repurchased 2.3 million shares at a total cost of $90 million in the reported quarter.

Our Viewpoint

We believe Legg Mason has the potential to outperform its peers over the long run, given its diversified product mix and leverage in the changing market demography. In addition to this, with strategic acquisitions, restructuring initiatives and cost-cutting measures, we anticipate operating efficiencies to improve. Also, steady capital deployment activities continue to boost investors’ confidence in the stock. However, escalating expenses remain a key concern.

Legg Mason currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Competitive Landscape

Ameriprise Financial Inc.’s (NYSE:AMP) third-quarter 2017 operating earnings per share of $3.53 comfortably surpassed the Zacks Consensus Estimate of $2.86. Also, the figure compares favorably with $1.37 per share registered in the year ago quarter. Results benefitted from a decline in expenses. Also, growth in AUM and assets under administration (AUA) were on the positive side. However, a slight decline in revenues acted as a headwind.

Waddell & Reed Financial Inc.’s (NYSE:WDR) third-quarter 2017 earnings of 45 cents per share outpaced the Zacks Consensus Estimate of 40 cents. However, it compared unfavorably with the year-ago quarter’s earnings of 65 cents. Results were adversely affected by lower revenues and a rise in expenses. Also, despite higher gross sales and a fall in net outflows during the quarter, AUM continued to decline. Nevertheless, a solid balance sheet position was a positive for the company.

BlackRock, Inc. (NYSE:BLK) reported third-quarter 2017 adjusted earnings of $5.92 per share, which outpaced the Zacks Consensus Estimate of $5.59. Also, the bottom line came in 15% higher than the year-ago quarter. Results benefited from improvement in revenues, rise in AUM and steady long-term inflows. Nonetheless, increase in operating expenses remained a headwind.

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