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Legg Mason's Earnings Lag

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Legg Mason Inc.’s (LM - Free Report) fiscal first-quarter 2014 adjusted earnings came in at 68 cents per share, missing the Zacks Consensus Estimate by 3 cents. However, this came above the year-ago figure of 64 cents per share.

Lower-than-expected results were due to higher operating expenses. However, top-line growth, aided primarily by an increase in both investment advisory fees and other revenues was a tailwind.

Adjusted net income came in at $85.2 million, compared with $88.6 million in the prior-year quarter. Including one-time items, Legg Mason reported net income of $47.8 million or 38 cents per share, compared with a loss of $9.5 million or 7 cents in the prior-year quarter.

Performance in Detail

Legg Mason’s total revenue came in at $670.4 million, up 6% year over year. The rise was due to an increase in average long-term assets under management (AUM), higher performance fees, and a favorable asset mix shift. Moreover, revenues surpassed the Zacks Consensus Estimate of $655.0 million.

Investment Advisory fees climbed 7% year over year to $583.5 million. Distribution and Service fees rose 4% to $84.9 million. Moreover, other revenues were up 26% year over year to $2.0 million.

Operating expenses increased 6% to $586.9 million on a year-over-year basis. The rise was primarily due to increased compensation related to higher revenues. Expenses included costs worth $26.3 million related to the ClearBridge American Energy MLP closed-end fund launch, compared with $22.7 million in fund launch costs in the first quarter of fiscal 2013.

Adjusted operating margin of Legg Mason was 17.9%, up from 17.6% in the prior-year quarter.

Assets Position

As of Jun 30, 2013, Legg Mason’s AUM was $644.5 billion, up 2% year over year from $631.8 billion.  Of total AUM, fixed income constituted 54%, liquidity 20% and equity 26%.

Liquidity and equity outflows were $8.7 billion and $0.7 billion, respectively, while fixed income inflows were $0.9 billion for the quarter ended Jun 30, 2013. Additionally, average AUM was $654.7 billion, compared with $635.5 billion in the prior-year quarter.

Balance Sheet

As of Jun 30, 2013, Legg Mason had approximately $0.7 billion in cash, down 22% from the prior quarter, while total debt was $1.1 billion, in line with the prior-quarter amount. Shareholders’ equity decreased to $4.7 billion from $4.8 billion in the prior quarter.

The ratio of total debt to total capital (total equity plus total debt excluding consolidated investment vehicles) was 19%, in line with the prior quarter.

Capital Deployment Update

Along with its earnings, Legg Mason’s board of directors declared a quarterly cash dividend of 13 cents per share. The dividend will be paid on Oct 21, 2013 to shareholders of record as of Oct 3. Moreover, the company purchased 2.6 million shares in the said quarter.

Our Viewpoint

We believe Legg Mason has the potential to outperform its peers in the long run, given its diversified product mix and leverage in the changing market demography. However, asset outflows will remain a significant headwind in the near term. Nevertheless, with restructuring initiatives and the cost-cutting measures, we expect operating efficiencies to improve, and dividend payments to continue boosting investors’ confidence in the stock.

Legg Mason currently carries a Zacks Rank #3 (Hold). Some other investment managers that are worth considering include The Blackstone Group L.P. (BX - Free Report) , Fortress Investment Group LLC and Pzena Investment Management, Inc (PZN - Free Report) . All these stocks carry a Zacks Rank #2 (Buy).

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