Legg Mason Inc. ( LM - Analyst Report ) is scheduled to report its fiscal first-quarter 2012 results before the opening bell on Thursday, July 28. The Zacks Consensus Estimate for the first quarter is 39 cents per share, representing an increase of about 31% from the year-ago quarter.

We believe Legg Mason has the potential to outperform its peers in the long run, given its diversified product mix and leverage to the changing demographics in the market. Although the last quarter witnessed a decline in outflows, assets outflows remain a significant headwind in the near term. Yet, with the restructuring initiatives and cost-cutting measures, we expect operating leverage to improve, and share buybacks to continue inspiring investors confidence in the stock.

Previous Quarter Performance

Legg Mason’s fourth-quarter 2011 earnings of 77 cents per share significantly outpaced the Zacks Consensus Estimate of 45 cents. Results included 7 cents per share in transition-related costs. Earnings also surpassed the prior-year quarter figure by 8 cents. Results improved due to higher revenue, offset by higher operating expenses, coupled with a decline in total AUM.

Earnings Estimate Revisions – Overview

Prior to the results release, earnings estimate decreased by a penny to 39 cents over the last 7 days. The decrease in estimate indicates weakness in the stock.

We will now look into the details of earnings estimate revisions to substantiate why investors should hold this stock.

Agreement of Analysts

Looking at the estimate revision trends, it is quite clear that analysts are in agreement with the bearish fiscal first-quarter earnings outlook for Legg Mason. Of the 12 analysts covering the stock, none has edged up the estimate for the first quarter over the last 7 days, while two downward revisions were witnessed.

Moreover, for FY12, none of the analysts has increased the estimate over the last 7 days and two moved in the opposite direction, wheres as for FY13, one analyst increased the estimate, while one decreased the same. This indicates no clear directional pressure on the performance of the stock in the near term.

Magnitude of Estimate Revisions

The Zacks Consensus Estimate for the fiscal first quarter decreased to operating earnings of 39 cents per share from 40 cents over the last 7 days. Moreover, estimates for FY12 decreased by a penny to $1.90. For FY13, estimates remained stable at $2.60.

Earnings Surprise

Legg Mason’s performance has been volatile over the trailing four quarters with respect to earnings surprises. The average earnings surprise was a positive 4.78%. This implies that the company has beaten the Zacks Consensus Estimate by the same magnitude over the last four quarters.

By and Large

Over the course of fiscal 2011, Legg Mason has launched a number of initiatives, such as streamlining of business model, solidification of strategic objectives and realignment of management team, which are expected to create value for its clients and shareholders.

During the March quarter, a number of events, such as the popular uprisings in the Middle East and the earthquake and tsunami in Japan, shocked the global economy. These events had an immediate impact on the global economy, both psychologically and fundamentally, including significantly higher oil and gas prices, which are slowing down the U.S. growth story. The U.S. stock market has risen to its highest levels since 2008 on the back of improved earnings in the corporate sector even with these headwinds.

Although the global economic recovery is expected to pick up in second half of 2011, it should remain gradual. Further, the current volatility in the financial markets and the government regulations pose the risk of interest rate fluctuation to the funds business of Legg Mason.

Conclusion

The estimate revision trends and magnitude of revision reflect no clear directional pressure on the shares over the near term.

Legg Mason currently retains its Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Moreover, considering the company’s business model and fundamentals, we have a long-term “Neutral” recommendation on the stock.

The closest competitor of Legg Mason, Virtus Investment Partners Inc. ( VRTS - Snapshot Report ) is expected to report its second-quarter 2011 earnings on August 2, 2011.