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Legg Mason (LM) to Report Q2 Earnings: What's in Store?

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Legg Mason, Inc. is scheduled to report its fiscal second-quarter 2017 (ended Sep 2016) results on Oct 28.

The Baltimore, MD-based asset manager’s fiscal first-quarter 2017 earnings missed the Zacks Consensus Estimate. Reduced revenues and higher expenses were the primary headwinds. However, the quarter had recorded an increase in assets under management (AUM).

Notably, Legg Mason has delivered positive earnings surprise in only one of the trailing four quarters. Regarding the stock’s performance, the company has lost nearly 20% year to date.

LEGG MASON INC Price and EPS Surprise

Will the upcoming earnings release put further stress on Legg Mason’s stock? Notably, our quantitative model doesn’t call for an earnings beat this time as well. Also, the Zacks Consensus Estimate of 58 cents per share for the fiscal second quarter indicates a year-over-year plunge of about 35%.

Here is what our model indicates:

Legg Mason doesn’t have the right combination of the two key ingredients – a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or 2 (Buy) or at least 3 (Hold) – that increases the odds of an earnings beat.

Zacks ESP: The Earnings ESP for Legg Mason is 0.00%. This is because the Most Accurate Estimate and the Zacks Consensus Estimate, both are pegged at 58 cents. Please check our Earnings ESP Filter that enables you to find stocks that are expected to come out with earnings surprises.

Zacks Rank: Legg Mason’s Zacks Rank #3 increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of a positive earnings surprise.

What to Expect in Fiscal Q2

The Jul-Sep 2016 quarter experienced strong performance of equity markets. S&P 500 Index gained 3.3% in the quarter. Also, the index measuring international equity performance – the MSCI EAFE Index – rose 5.8% during the quarter.
 
For Sep 2016, Legg Mason reported a 1.2% decline from Jun 2016 in its AUM  to $732.9 billion, as the company witnessed long-term outflows of $1.4 billion in the month. However, there was positive foreign exchange impact of $1.1 billion.

The rise in equity and fixed income AUM, partially offset by lower alternative AUM, resulted in long-term AUM of $637.3 billion. This figure marked a 2.6% increase from the month of June. However, liquid assets, which are convertible into cash, plummeted around 21% to $95.6 billion.

Several acquisitions made since the beginning of the year should lend support to Legg Mason’s upcoming results. The company expects performance fees for the fiscal second quarter to be almost stable on a sequential basis. The company anticipates the pass-through performance fees at Clarion to be in the range of $25–$30 million.

Compensation and benefits ratio for the quarter is expected to decline to the range of 52–54%, from 55% recorded in the fiscal first quarter.

Legg Mason is likely to record certain one-time charges in the quarter. In connection to the EnTrustPermal combination, Legg Mason expects severance and related charges in the range of $6–$8 million in the fiscal second quarter. Real estate related/other charges are projected in the range of $6–$10 million for the quarter. However, the company should benefit from the commencement of cost savings related to integration.

Operating margin in the fiscal second quarter is estimated at around 22.5%.

Stocks That Warrant a Look

Here are some stocks worth considering, as they have the right combination of elements to post an earnings beat this quarter.

Lazard Ltd. (LAZ - Free Report) , a Zacks Rank #2 stock, has an Earnings ESP of +3.90%. It is scheduled to report results on Oct 27. You can see the complete list of today’s Zacks #1 Rank stocks here.

Ares Capital Corp. (ARCC - Free Report) is slated to release results on Nov 2. The company has an Earnings ESP of +2.63 % and a Zacks Rank #3.

PennyMac Financial Services, Inc. (PFSI - Free Report) has an Earnings ESP of +6.82% and carries a Zacks Rank #2. The company is slated to release results on Nov 3.

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