A month has gone by since the last earnings report for Legg Mason . Shares have lost about 3% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Legg Mason due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Legg Mason Q1 Earnings Reflect Controlled Expenses
Legg Mason reported positive earnings surprise of 2.6% in first-quarter fiscal 2019 (ended Jun 30). The company reported adjusted net income of 80 cents per share, outpacing the Zacks Consensus Estimate of 78 cents. Moreover, results improved 21.2% year over year.
Controlled expenses and higher AUM were a positive factor. However, fall in revenues, resulting from lower investment advisory fees, remains a major drag.
Including certain one-time items, Legg Mason reported net income of $66.1 million or 75 cents per share compared with $50.9 million or 52 cents recorded in the year-ago quarter.
Revenues Down, Expenses Fall
Legg Mason’s total operating revenues in the reported quarter came in at $747.9 million, down 6% year over year. The fall mainly resulted from lower non-pass performance fees, as well as reduced pass-through performance fees. In addition, revenues lagged the Zacks Consensus Estimate of $754 million.
Investment advisory fees decreased 6.5% year over year to $667.6 million in the quarter. However, other revenues climbed 9.1% year over year to $1.2 million. Distribution and service fees were slightly up year over year to $79.2 million.
Operating expenses dropped 9% to $622.2 million on a year-over-year basis. The fall can be chiefly attributed to lower compensation and benefits expenses, as well as decrease in Clarion pass-through performance fees.
Adjusted operating margin of Legg Mason was 22.3% in the quarter, down from 22.5% recorded in the prior-year quarter.
Solid Assets Position
As of Jun 30, 2018, Legg Mason’s AUM was $744.6 billion, slightly up year over year from $741.2 billion. Of the total AUM, fixed income constituted 55%, equity 28%, liquidity 8% and alternatives represented 9%.
Nevertheless, AUM edged down 1.3% sequentially from $754.1 billion as of Mar 31, 2018, impacted by negative foreign exchange of $6.5 billion, liquidity outflows of $2.9 billion, long-term outflows of $0.9 billion and realizations of $0.3 billion. These were partly offset by positive market performance of $1.1 billion.
Notably, long-term net outflows of $0.9 billion included equity outflows of $2.2 billion, offset by fixed income inflows of $1.3 billion.
Additionally, average AUM was $749.5 billion compared with $740.3 billion witnessed in the prior-year quarter, and $766.9 billion in the previous quarter.
Strong Balance Sheet
As of Jun 30, 2018, Legg Mason had $590.5 million in cash. Total debt was $2.3 billion. Shareholders’ equity came in at $3.9 billion.
The ratio of total debt to total capital (total equity plus total debt excluding consolidated investment vehicles) was 38%, in line with the prior quarter.
Outlook
Second-Quarter Fiscal 2019
Non-pass through (NPT) performance fees are projected at $5-$15 million in second-quarter fiscal 2019. Also, pass-through performance fees of Clarion, is anticipated to add about $15 million to total GAAP revenues.
The company expects the comp ratio to remain in the range of 53-55%, underlining lower seasonal compensation impacts. Further, the operating margin is expected to increase slightly due to absence of seasonal compensation factors.
For fiscal 2019, management expects effective tax rate to fall between 26% and 30%. Additionally, cash tax rate is expected to be 7% in fiscal 2019, then remain below 10% over the next four to five years.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -8.17% due to these changes.
VGM Scores
At this time, Legg Mason has a poor Growth Score of F, however its Momentum is doing a bit better with a D. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
The company's stock is suitable solely for value based on our styles scores.
Outlook
Estimates have been broadly trending downward for the stock and the magnitude of this revision indicates a downward shift. Interestingly, Legg Mason has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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Legg Mason (LM) Down 3% Since Last Earnings Report: Can It Rebound?
A month has gone by since the last earnings report for Legg Mason . Shares have lost about 3% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Legg Mason due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Legg Mason Q1 Earnings Reflect Controlled Expenses
Legg Mason reported positive earnings surprise of 2.6% in first-quarter fiscal 2019 (ended Jun 30). The company reported adjusted net income of 80 cents per share, outpacing the Zacks Consensus Estimate of 78 cents. Moreover, results improved 21.2% year over year.
Controlled expenses and higher AUM were a positive factor. However, fall in revenues, resulting from lower investment advisory fees, remains a major drag.
Including certain one-time items, Legg Mason reported net income of $66.1 million or 75 cents per share compared with $50.9 million or 52 cents recorded in the year-ago quarter.
Revenues Down, Expenses Fall
Legg Mason’s total operating revenues in the reported quarter came in at $747.9 million, down 6% year over year. The fall mainly resulted from lower non-pass performance fees, as well as reduced pass-through performance fees. In addition, revenues lagged the Zacks Consensus Estimate of $754 million.
Investment advisory fees decreased 6.5% year over year to $667.6 million in the quarter. However, other revenues climbed 9.1% year over year to $1.2 million. Distribution and service fees were slightly up year over year to $79.2 million.
Operating expenses dropped 9% to $622.2 million on a year-over-year basis. The fall can be chiefly attributed to lower compensation and benefits expenses, as well as decrease in Clarion pass-through performance fees.
Adjusted operating margin of Legg Mason was 22.3% in the quarter, down from 22.5% recorded in the prior-year quarter.
Solid Assets Position
As of Jun 30, 2018, Legg Mason’s AUM was $744.6 billion, slightly up year over year from $741.2 billion. Of the total AUM, fixed income constituted 55%, equity 28%, liquidity 8% and alternatives represented 9%.
Nevertheless, AUM edged down 1.3% sequentially from $754.1 billion as of Mar 31, 2018, impacted by negative foreign exchange of $6.5 billion, liquidity outflows of $2.9 billion, long-term outflows of $0.9 billion and realizations of $0.3 billion. These were partly offset by positive market performance of $1.1 billion.
Notably, long-term net outflows of $0.9 billion included equity outflows of $2.2 billion, offset by fixed income inflows of $1.3 billion.
Additionally, average AUM was $749.5 billion compared with $740.3 billion witnessed in the prior-year quarter, and $766.9 billion in the previous quarter.
Strong Balance Sheet
As of Jun 30, 2018, Legg Mason had $590.5 million in cash. Total debt was $2.3 billion. Shareholders’ equity came in at $3.9 billion.
The ratio of total debt to total capital (total equity plus total debt excluding consolidated investment vehicles) was 38%, in line with the prior quarter.
Outlook
Second-Quarter Fiscal 2019
Non-pass through (NPT) performance fees are projected at $5-$15 million in second-quarter fiscal 2019. Also, pass-through performance fees of Clarion, is anticipated to add about $15 million to total GAAP revenues.
The company expects the comp ratio to remain in the range of 53-55%, underlining lower seasonal compensation impacts. Further, the operating margin is expected to increase slightly due to absence of seasonal compensation factors.
For fiscal 2019, management expects effective tax rate to fall between 26% and 30%. Additionally, cash tax rate is expected to be 7% in fiscal 2019, then remain below 10% over the next four to five years.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -8.17% due to these changes.
VGM Scores
At this time, Legg Mason has a poor Growth Score of F, however its Momentum is doing a bit better with a D. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
The company's stock is suitable solely for value based on our styles scores.
Outlook
Estimates have been broadly trending downward for the stock and the magnitude of this revision indicates a downward shift. Interestingly, Legg Mason has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.