It has been about a month since the last earnings report for Legg Mason, Inc. . Shares have added about 10.5% in that time frame, outperforming the market.
Will the recent positive trend continue leading up to the stock’s next earnings release, or is it due for a pullback? 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 drivers.
Legg Mason Q3 Earnings Lag Estimates on High Costs
Legg Mason reported negative earnings surprise of 21.9% in third-quarter fiscal 2017 (ended Dec 31). The company reported net income of $0.50 per share, considerably missing the Zacks Consensus Estimate of $0.64. Notably, the company recorded loss in the prior-year quarter. Reported quarter results include certain non-recurring items.
Higher expenses were the primary headwinds. However, increase in revenues, higher AUM and steady capital deployment activities remained tailwinds.
Including one-time items, Legg Mason reported net income of $51.4 million compared with a loss of $138.6 million in the prior-year quarter.
Revenues Rise, Expenses Escalate
Legg Mason’s total operating revenue in the quarter came in at $715.2 million, up 8.4% year over year. The rise was mainly due to AUM mix though increased revenues associated with the addition of Clarion and EnTrust, along with higher performance fees. Moreover, revenues outpaced the Zacks Consensus Estimate of $689 million.
Investment advisory fees climbed 10.8% year over year to $623.8 million in the quarter. Further, other revenues increased significantly year over year to $1.25 million. However, distribution and service fees were down 5.9% year over year to $90.2 million.
Operating expenses plunged 33% to $604.1 million on a year-over-year basis. Excluding the non-cash impairment charge of $35.0 million, operating expenses jumped 8% year over year, chiefly due to the addition of expenses of Clarion and Entrust and acquisition and transition-related costs. Moreover, compensation and benefits escalated 15.9% year over year.
Adjusted operating margin of Legg Mason was 23.9%, up from 20.6% in the prior-year quarter.
Solid Assets Position
As of Dec 31, 2016, Legg Mason’s AUM was $710.4 billion, up 6% year over year from $671.5 billion. Of the total AUM, fixed income constituted 54%, equity 24%, liquidity 12% and alternatives represented 10%.
AUM decreased 3.1% sequentially from $732.9 billion as of Sep 30, 2016, driven by outflows of $10.9 billion, negative market performance of $2.3 billion, $8.4 billion in negative foreign exchange and $0.9 billion associated with the sale of Legg Mason Poland.
Additionally, average AUM was $716.7 billion, compared with $742.1 billion in the prior quarter and $683.0 billion in the year-earlier quarter.
Strong Balance Sheet
As of Dec 31, 2016, Legg Mason had $690 million in cash, up from $571 million in the prior quarter. Total debt was $2.2 billion, in line with the preceding quarter. Shareholders’ equity was $4.0 billion, down from $4.1 billion in the previous quarter.
The ratio of total debt to total capital (total equity plus total debt excluding consolidated investment vehicles) was 36%, in line with the prior quarter.
Legg Mason repurchased 3.0 million shares for $90 million in the reported quarter.
Outlook
Legg Mason expects non-pass-through performance fees for the next quarter to range from $5–$10 million. The company anticipates the pass-through performance fees at Clarion to be about $7 million in fiscal fourth-quarter 2017.
For fiscal fourth-quarter 2017, management projects acquisition and transition related expenses to range from $3–$4 million.
Estimated savings related to the EnTrustPermal combination is projected at $35 million in fiscal 2018.
The GAAP tax rate is projected to be 27% for fiscal 2017. The company’s cash tax rate is projected to stay below 10% during fiscal 2018.
For fourth-quarter fiscal 2017, management expects the comp ratio to drop down to 52– 54% and for fiscal 2017, the comp ratio is expected to be in the range of 53–55%.
As a result of withdrawals and interest rate increases, fee waivers are likely to aggregate about $25 million in fiscal 2017.
Regarding the EnTrust acquisition, the company estimates about $3,000–$4,000 of the $8,000–$10,000 of remaining anticipated costs associated with the combination to be incurred during fourth-quarter fiscal 2017, with the remainder to be incurred during fiscal 2018 and fiscal 2019. In connection with the combination, management expects to incur restructuring and transition-related costs of about $91–$93 million, of which 15% are non-cash charges. As of Dec 31, 2016, about $83 million of these charges have been incurred and $59 million have been paid. Excluding $7 million of lease obligations, which will be paid over the remaining lease term, the significant portion of the remaining cash charges will be paid in fourth-quarter fiscal 2017.
Management intends to utilize up to $90 million of cash generated from future operations to repurchase common stock on quarterly basis. Additionally, the company does not currently expect to raise incremental debt or equity financing over the next 12 months.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed a downward trend in fresh estimates. There has been one downward revisions for the current quarter.
VGM Scores
At this time, Legg Mason's stock has a poor Growth score of 'F', however its Momentum is doing a bit better with a 'C'. 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.
Based on our styles scores, the stock is more suitable for value investors than momentum investors.
Outlook
Notably, the stock has a Zacks Rank #4 (Sell). We are expecting an inline return from the stock in the next few months.
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Legg Mason (LM) Up 10.5% Since Earnings Report: Can It Continue?
It has been about a month since the last earnings report for Legg Mason, Inc. . Shares have added about 10.5% in that time frame, outperforming the market.
Will the recent positive trend continue leading up to the stock’s next earnings release, or is it due for a pullback? 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 drivers.
Legg Mason Q3 Earnings Lag Estimates on High Costs
Legg Mason reported negative earnings surprise of 21.9% in third-quarter fiscal 2017 (ended Dec 31). The company reported net income of $0.50 per share, considerably missing the Zacks Consensus Estimate of $0.64. Notably, the company recorded loss in the prior-year quarter. Reported quarter results include certain non-recurring items.
Higher expenses were the primary headwinds. However, increase in revenues, higher AUM and steady capital deployment activities remained tailwinds.
Including one-time items, Legg Mason reported net income of $51.4 million compared with a loss of $138.6 million in the prior-year quarter.
Revenues Rise, Expenses Escalate
Legg Mason’s total operating revenue in the quarter came in at $715.2 million, up 8.4% year over year. The rise was mainly due to AUM mix though increased revenues associated with the addition of Clarion and EnTrust, along with higher performance fees. Moreover, revenues outpaced the Zacks Consensus Estimate of $689 million.
Investment advisory fees climbed 10.8% year over year to $623.8 million in the quarter. Further, other revenues increased significantly year over year to $1.25 million. However, distribution and service fees were down 5.9% year over year to $90.2 million.
Operating expenses plunged 33% to $604.1 million on a year-over-year basis. Excluding the non-cash impairment charge of $35.0 million, operating expenses jumped 8% year over year, chiefly due to the addition of expenses of Clarion and Entrust and acquisition and transition-related costs. Moreover, compensation and benefits escalated 15.9% year over year.
Adjusted operating margin of Legg Mason was 23.9%, up from 20.6% in the prior-year quarter.
Solid Assets Position
As of Dec 31, 2016, Legg Mason’s AUM was $710.4 billion, up 6% year over year from $671.5 billion. Of the total AUM, fixed income constituted 54%, equity 24%, liquidity 12% and alternatives represented 10%.
AUM decreased 3.1% sequentially from $732.9 billion as of Sep 30, 2016, driven by outflows of $10.9 billion, negative market performance of $2.3 billion, $8.4 billion in negative foreign exchange and $0.9 billion associated with the sale of Legg Mason Poland.
Additionally, average AUM was $716.7 billion, compared with $742.1 billion in the prior quarter and $683.0 billion in the year-earlier quarter.
Strong Balance Sheet
As of Dec 31, 2016, Legg Mason had $690 million in cash, up from $571 million in the prior quarter. Total debt was $2.2 billion, in line with the preceding quarter. Shareholders’ equity was $4.0 billion, down from $4.1 billion in the previous quarter.
The ratio of total debt to total capital (total equity plus total debt excluding consolidated investment vehicles) was 36%, in line with the prior quarter.
Legg Mason repurchased 3.0 million shares for $90 million in the reported quarter.
Outlook
Legg Mason expects non-pass-through performance fees for the next quarter to range from $5–$10 million. The company anticipates the pass-through performance fees at Clarion to be about $7 million in fiscal fourth-quarter 2017.
For fiscal fourth-quarter 2017, management projects acquisition and transition related expenses to range from $3–$4 million.
Estimated savings related to the EnTrustPermal combination is projected at $35 million in fiscal 2018.
The GAAP tax rate is projected to be 27% for fiscal 2017. The company’s cash tax rate is projected to stay below 10% during fiscal 2018.
For fourth-quarter fiscal 2017, management expects the comp ratio to drop down to 52– 54% and for fiscal 2017, the comp ratio is expected to be in the range of 53–55%.
As a result of withdrawals and interest rate increases, fee waivers are likely to aggregate about $25 million in fiscal 2017.
Regarding the EnTrust acquisition, the company estimates about $3,000–$4,000 of the $8,000–$10,000 of remaining anticipated costs associated with the combination to be incurred during fourth-quarter fiscal 2017, with the remainder to be incurred during fiscal 2018 and fiscal 2019. In connection with the combination, management expects to incur restructuring and transition-related costs of about $91–$93 million, of which 15% are non-cash charges. As of Dec 31, 2016, about $83 million of these charges have been incurred and $59 million have been paid. Excluding $7 million of lease obligations, which will be paid over the remaining lease term, the significant portion of the remaining cash charges will be paid in fourth-quarter fiscal 2017.
Management intends to utilize up to $90 million of cash generated from future operations to repurchase common stock on quarterly basis. Additionally, the company does not currently expect to raise incremental debt or equity financing over the next 12 months.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed a downward trend in fresh estimates. There has been one downward revisions for the current quarter.
Legg Mason, Inc. Price and Consensus
Legg Mason, Inc. Price and Consensus | Legg Mason, Inc. Quote
VGM Scores
At this time, Legg Mason's stock has a poor Growth score of 'F', however its Momentum is doing a bit better with a 'C'. 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.
Based on our styles scores, the stock is more suitable for value investors than momentum investors.
Outlook
Notably, the stock has a Zacks Rank #4 (Sell). We are expecting an inline return from the stock in the next few months.