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On Sep 20, we upgraded asset management firm Legg Mason Inc. (LM - Analyst Report) to Neutral based on the sequential decline in the company’s expenses. Legg Mason, which focuses on growth and preservation of clients' capital through its proprietary mutual funds and separately managed accounts, has also experienced top-line growth in fiscal first-quarter 2014.

Why the Upgrade?

Legg Mason has been actively striving to improve its profitability through key initiatives, such as adding innovative product solutions to client bases, tapping potential investment capacities, expanding distribution relationships and undertaking cost-saving measures. We expect the company’s aggressive cost cuts to aid in driving profitability, going forward.

Legg Mason’s opportunistic acquisitions are expected to benefit the company in the near term. The company and its affiliate, Permal Group, completed the acquisition of London-based fund-of-hedge-funds firm, Fauchier Partners in the last quarter.

On Jul 25, Legg Mason announced its fiscal first-quarter 2014 adjusted earnings, which missed the Zacks Consensus Estimate but was above the year-ago figure. Lower-than-expected results were due to rise in operating expenses. However, top-line growth, aided primarily by an increase in both investment advisory fees and other revenues was a tailwind.

Over the past 60 days, the Zacks Consensus Estimate for fiscal 2014 rose 1.2% to $3.38 per share. However, for fiscal 2015, the Zacks Consensus Estimate declined 0.3% to $3.86 over the same period. Therefore, Legg Mason currently carries a Zacks Rank #3 (Hold).

Moreover, we are concerned about the low interest rate environment, decreased asset outflows and a volatile economy. The asset management business is under cyclical and secular pressures, which were heightened by the financial crisis. Though Legg Mason is well positioned over the long term, economic challenges are expected to persist and negatively impact the company’s near-term results.

Other Stocks to Consider

Apart from Legg Mason, other stocks in the same sector that are worth consideration include Affiliated Managers Group Inc. (AMG - Analyst Report), The Blackstone Group L.P. (BX - Analyst Report) and Brookfield Asset Management Inc. (BAM - Snapshot Report). All of these carry a Zacks Rank #2 (Buy).

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