Balanced View on Legg Mason

On Mar 15, we reiterated our Neutral recommendation on Legg Mason Inc. ( LM - Analyst Report ) based on its rising top-line and healthy capital position. However, rising expenses and higher net client outflows remain the major causes of concern. Legg Mason carries a Zacks Rank #2 (Buy).

Why Neutral?

Legg Mason’s fourth quarter 2012 earnings came in at 70 cents per share, significantly outpacing the Zacks Consensus Estimate by 16 cents. Total revenues came in at $673.9 million, up 8% from the prior-year quarter. Moreover, revenues surpassed the Zacks Consensus Estimate of $673.0 million.

Over the last 60 days, the Zacks Consensus Estimate for 2013 surged 78%, on the back of upward movement of a number of estimates. The Zacks Consensus Estimate for 2014 escalated 30% over the same time frame. Further, an improving investment advisory income and opportunistic acquisitions helped the company sustain the Neutral recommendation.

Further, healthy cash position and implementation of the new capital plan in the first half of the fiscal 2013 are positives for the stock. Extensive capital deployment activities also continue to reinforce investors’ confidence in the stock.

However, the low interest rate environment and changing regulatory landscape are expected to be the headwinds in the future. Further, we remain concerned about the asset outflows of the company. Additionally, we are skeptical about the continuously rising regulatory expenses, which may temper profitability in the near-to-mid term.

Other Stocks to Consider

Other banking stocks that are currently performing better than Legg Mason include First Defiance Financial Corp. ( FDEF - Snapshot Report ) , Flagstar Bancorp Inc. ( FBC - Snapshot Report ) and Meta Financial Group, Inc. ( CASH - Snapshot Report ) . All these carry a Zacks Rank #1 (Strong Buy).