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On Jul 10, 2013, we downgraded our recommendation on Legg Mason Inc. (LM - Analyst Report) to Underperform from Outperform. Our decision was based on the company’s high level of net asset outflows.

Why the Downgrade?

Legg Mason is scheduled to announce fiscal first-quarter 2014 results on Jul 25. Notably, the company’s activities during the quarter did not win analysts’ confidence. As a result, the Zacks Consensus Estimate for the quarter has moved down 3.6% to 80 cents over the last 30 days. Additionally, the earnings ESP (Read:Zacks Earnings ESP: A Better Method) for the quarter is -2.50%. This, along with its Zacks Rank #5 (Strong Sell), reduces the company’s chances of a positive earnings surprise.

Further, the likelihood of a downward estimate revision was more obvious for fiscal years 2014 and 2015. The Zacks Consensus Estimate went down 1.4% to $3.42 per share for 2014 and 0.5% to $3.93 per share for 2015 over the same time frame.

Moreover, Legg Mason’s fiscal fourth-quarter 2013 adjusted earnings lagged the Zacks Consensus Estimate.The earnings miss was primarily due to higher expenses.

The company’s initiatives to improve profitability through adding innovative product solutions to client bases, tapping potential investment capacities, expanding distribution relationships and undertaking cost-saving measures are commendable.  However, a sluggish economic recovery and net asset outflows remain plausible concerns. Hence, an improvement in the overall profitability might be limited in the near term.

Other Stocks to Consider

Even though we are not optimistic about Legg Mason’s earnings, there are many financial companies that are likely to beat earnings this quarter. Here are some stocks that are worth a look as our model shows them to have the right combination of elements to post an earnings beat this quarter:

Prosperity Bancshares Inc. (PB - Analyst Report), with earnings ESP of 1.14% and a Zacks Rank #2 (Buy).

First Horizon National Corporation (FHN - Analyst Report), with earnings ESP of 5.26% and a Zacks Rank #3 (Hold).

Fifth Third Bancorp (FITB - Analyst Report), with earnings ESP of 2.27% and a Zacks Rank #3.

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