It has been about a month since the last earnings report for Legg Mason, Inc. (LM - Free Report) . Shares have added about 3.7% in that time frame.
Will the recent positive trend continue leading up to its next earnings release, or is LM due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Legg Mason Q4 Earnings Beat on High Revenues, Costs Up
Legg Mason reported positive earnings surprise of 22.9% in fourth-quarter fiscal 2018 (ended Mar 31). The company reported adjusted net income of 86 cents per share, outpacing the Zacks Consensus Estimate of 70 cents. Moreover, results improved 13.2% year over year.
Top-line strength and steady AUM were the tailwinds. However, rise in expenses remain a major drag.
Legg Mason reported net income of $76.3 million compared with $75.9 million recorded in the year-ago quarter.
Including certain one-time items, for fiscal 2018, net income came in at $352.1 million or $3.72 per share compared with $227.3 million or $2.18 per share in the prior fiscal.
Revenues Rise, Expenses Flare Up
For fiscal 2018, Legg Mason reported total revenues of $3.1 billion, up 9% year over year, reflecting higher average long-term AUM, along with elevated non-pass through as well as pass-through performance fees. Revenues came in almost in line with the Zacks Consensus Estimate.
Legg Mason’s total operating revenues in the quarter came in at $785.1 million, up 9% year over year. The upsurge was mainly due to elevated average long-term AUM and non-pass performance fees, as well as higher pass-through performance fees. In addition, revenues outpaced the Zacks Consensus Estimate of $759.3 million.
Investment advisory fees increased 11.3% year over year to $702.6 million in the quarter. Further, other revenues surged 66.7% year over year to $1.5 million. However, distribution and service fees were down 10.7% year over year to $80.9 million.
Operating expenses rose 1% to $618.3 million on a year-over-year basis. The rise was chiefly due to higher compensation and benefits expenses, other expenses, and communications and technology expenses.
Adjusted operating margin of Legg Mason was 23.8%, up from 20.6% recorded in the prior-year quarter.
Solid Assets Position
As of Mar 31, 2018, Legg Mason’s AUM was $754.1 billion, up 3.5% year over year from $728.4 billion. Of the total AUM, fixed income constituted 56%, equity 27%, liquidity 8% and alternatives represented 9%.
Nevertheless, AUM edged down 1.7% sequentially from $767.2 billion as of Dec 31, 2017, impacted by negative market performance, and other of $3.1 billion and realizations of $0.5 billion. Furthermore, long-term inflows of $1.2 billion were offset by liquidity outflows of $10.7 billion. However, positive foreign exchange of $2.9 billion was a favorable factor.
Notably, long-term net inflows of $2.1 billion included equity outflows of $3.2 billion, offset by fixed income inflows of $2.8 billion and alternative inflows of $0.5 billion. Additionally, average AUM was $766.9 billion compared with $718.9 billion witnessed in the prior-year quarter, and $759.9 billion in the previous quarter.
Strong Balance Sheet
As of Mar 31, 2018, Legg Mason had $736.1 million in cash. Total debt was $2.4 billion, including $100-million revolver repayment in March 2018. Shareholders’ equity came in at $3.9 billion.
The ratio of total debt to total capital (total equity plus total debt excluding consolidated investment vehicles) was 38%, down from 39% in the prior quarter.
Capital Deployment Update
In the reported quarter, Legg Mason did not retired shares as accelerated repurchases occurred in the prior quarter.
First-Quarter Fiscal 2019
Non-pass through (NPT) performance fees are expected to be about $10-$15 million in first-quarter fiscal 2019. Also, pass-through performance fees of Clarion, is anticipated to add about $10 million to total GAAP performance fees of $20-$25 million.
Other expenses are expected to decrease to $55 million.
The company expects the comp ratio to remain in the range of 54-56%, reflecting ongoing seasonal impacts. Further, the operating margin is expected to decrease slightly due to ongoing seasonal expenses and decline in NPT performance fees.
For fiscal 2019, management expects effective tax rate to fall between 22% and 26%. Further, cash tax rate is expected to be 8% in fiscal year 2019, then remaining below 10% over the next four to five years.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. There have been two revisions higher for the current quarter compared to one lower.
At this time, LM has a subpar Growth Score of D, though it is lagging a bit on the momentum front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
The company's stock is suitable solely for value based on our styles scores.
Estimates have been broadly trending upward for the stock and the magnitude of these revisions looks promising. Notably, LM has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.