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Legg Mason (LM) Q4 Earnings Beat Estimates on High Revenues

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Legg Mason Inc. (LM - Free Report) reported positive earnings surprise of 46% in fourth-quarter fiscal 2017 (ended Mar 31). The company reported adjusted net income of 92 cents per share, considerably beating the Zacks Consensus Estimate of 63 cents. Moreover, results compared favorably with net loss of 15 cents in the prior-year quarter.

Solid top-line performance, increase in assets under management (AUM) and steady capital deployment activities were the tailwinds. However, escalating expenses remain a concern.

Including one-time items, Legg Mason reported net income of $75.9 million or 76 cents per share compared with net loss of $45.3 million or 43 cents in the year-ago quarter.

Including certain one-time items, for fiscal 2017, net income came in at $227.3 million or $2.18 per share compared with a net loss of $25 million or 25 cents per share in the prior fiscal.

Revenues Jump Amid Rising Expenses

For fiscal 2017, Legg Mason reported total revenue of $2.9 billion, up 7.4% year over year, reflecting additional revenues of Clarion and EnTrust, along with elevated non-pass through performance fees. Revenues were almost in line with the Zacks Consensus Estimate.

Legg Mason’s total operating revenue in the fiscal fourth quarter came in at $723.1 million, up 16.7% year over year. The upsurge was mainly due to elevated average equity and performance fees, along with revenues associated with the addition of Clarion and EnTrust. In addition, revenues outpaced the Zacks Consensus Estimate of $702.7 million.

Investment advisory fees increased 19.2% year over year to $631.5 million in the quarter. Further, distribution and service fees were up 1.7% year over year to $90.6 million. Additionally, other revenues surged 78.2% year over year to $0.9 million.

Operating expenses increased 4.7% to $613.2 million on a year-over-year basis. The rise was chiefly due to charges related to addition of Clarion and Entrust. Moreover, compensation and benefits advanced 6.8% year over year.

Adjusted operating margin of Legg Mason was 20.6%, significantly up from 5.9% in the prior-year quarter.

Solid Assets Position

As of Mar 31, 2017, Legg Mason’s AUM was $728.4 billion, up 8.8% year over year from $669.6 billion. Of the total AUM, fixed income constituted 54%, equity 25%, liquidity 12% and alternatives represented 9%.

AUM increased 2.5% sequentially from $728.4 billion as of Dec 31, 2016, driven by positive market performance of $17.1 billion, net inflows of $0.8 billion and $4.0 billion in positive foreign exchange. These positives were partially offset by reduction due to the sales of LMM and Glouston Partners, worth $3.9 billion.

Notably, long-term net inflows of $3.9 billion included equity inflows of $3.1 billion and fixed income inflows of $3.5 billion, partially mitigated by alternative outflows of $2.7 billion. Liquidity outflows were $3.1 billion. Additionally, average AUM was $718.9 billion compared with $662.3 billion in the prior-year quarter and $716.7 billion in the prior quarter.

Strong Balance Sheet

As of Mar 31, 2017, Legg Mason had $734 million in cash. Total debt was $2.2 billion, while shareholders’ equity came in at $4.0 billion.

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.

Capital Deployment Update

Legg Mason repurchased 2.6 million shares in the reported quarter.

Concurrent with the earnings release, Legg Mason announced a hike in its quarterly common stock dividend to 28 cents per share, up 27%. The new dividend will be paid on Jul 10 to shareholders on record as of Jun 13.

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. Further, with strategic acquisitions, restructuring initiatives and cost-cutting measures, we anticipate operating efficiencies to improve. Also, steady capital deployment activities continue to boost investor confidence in the stock. However, escalating expenses remain a key concern.

Legg Mason, Inc. Price, Consensus and EPS Surprise

Legg Mason, Inc. Price, Consensus and EPS Surprise | Legg Mason, Inc. Quote

Legg Mason currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Competitive Landscape

T. Rowe Price Group, Inc. (TROW - Free Report) reported negative earnings surprise of 1.7% for first-quarter 2017. Adjusted earnings per share of $1.18 missed the Zacks Consensus Estimate of $1.20. However, the bottom line improved 16.8% from the year-ago figure of $1.01.

Janus Capital Group, Inc. recorded a positive earnings surprise of 9.5% in first-quarter 2017. The company reported adjusted earnings per share of 23 cents, beating the Zacks Consensus Estimate of 21 cents. In addition, results came above the prior-year quarter figure of 19 cents.

The Blackstone Group L.P. (BX - Free Report) reported first-quarter 2017 economic net income (ENI) of 82 cents per share, which surpassed the Zacks Consensus Estimate of 69 cents. Moreover, the figure compared favorably with 31 cents recorded in the prior-year quarter.

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