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Legg Mason (LM) Q2 Earnings Miss Estimates on Low Revenues

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Legg Mason Inc. (LM - Free Report) reported negative earnings surprise of 2.4% in second-quarter fiscal 2019 (ended Sep 30). The company reported adjusted net income of 81 cents per share, lagging the Zacks Consensus Estimate of 83 cents. However, results improved 2.5% year over year.

Fall in revenues, resulting from lower investment advisory fees, remains a major drag. However, controlled expenses and higher assets under management (AUM) were positives.

Including certain one-time items, Legg Mason reported net income of $72.8 million or 82 cents per share compared with $75.7 million or 78 cents recorded in the year-ago quarter.

Revenues Decline, Expenses Drop

Legg Mason’s total operating revenues in the reported quarter came in at $758.4 million, down 1% year over year. The fall mainly resulted from lower non-pass performance fees. However, the revenue figure surpassed the Zacks Consensus Estimate of $755.3 million.

Investment advisory fees edged down 1.4% year over year to $677.4 million in the quarter. Distribution and service fees were down 2% year over year to $79.1 million. Nonetheless, other revenues climbed significantly year over year to $2 million.

Operating expenses dropped slightly to $622.7 million on a year-over-year basis. The fall can be chiefly attributed to lower compensation and benefits, along with reduced distribution and servicing expenses.

Non-operating expense was $24.8 million, up 37% year over year.

Adjusted operating margin of Legg Mason was 23.6% in the Sep-end quarter, down from 24.9% recorded in the prior-year quarter.

Solid Assets Position

As of Sep 30, 2018, Legg Mason’s AUM was $755.4 billion, slightly up year over year from $754.4 billion. Of the total AUM, fixed income constituted 55%, equity 28%, liquidity 8% and alternatives represented 9%.

Further, AUM inched up 1.5% sequentially from $744.6 billion as of Jun 30, 2018, driven by a positive market performance of $11.0 billion and liquidity inflows of $3.0 billion. These were partly countered by negative foreign exchange of $2 billion, long-term outflows of $1 billion and realizations of $0.2 billion.

Notably, long-term net outflows of $1 billion included equity outflows of $1.1 billion and fixed income outflows of $0.5 billion, partly offset by alternative inflows of $0.6 billion.

Additionally, average AUM was $750.2 billion compared with $750.3 billion witnessed in the prior-year quarter, and $749.5 billion in the previous quarter.

Strong Balance Sheet

As of Sep 30, 2018, Legg Mason had $611.2 million in cash. Total debt was $2.2 billion. 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 37%, down from 38% in the prior quarter.

Our Viewpoint

We believe Legg Mason has the potential to outperform its peers over the long run, given its diversified product mix and leverage in the changing market demography. In addition to these, with strategic acquisitions, restructuring initiatives and cost-cutting measures, we anticipate the company’s operating efficiencies to improve. Nevertheless, declining revenues 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

Blackstone (BX - Free Report) reported third-quarter 2018 economic net income (ENI) of 76 cents per share, which surpassed the Zacks Consensus Estimate of 73 cents. The figure also improved 12% from the prior-year quarter. Results benefited from increase in revenues, which was supported by growth in assets under management and inflows. However, rise in expenses was the undermining factor.

Invesco (IVZ - Free Report) reported adjusted earnings of 66 cents per share, lagging the Zacks Consensus Estimate by a penny, in the Jul-Sep quarter. Also, the figure came in 7% lower than the prior-year tally. Results were primarily supported by slight GAAP revenue growth and a rise in AUM. However, increase in operating expenses was an undermining factor.

Ameriprise Financial Services (AMP - Free Report) came out with quarterly earnings of $3.74 per share, beating the Zacks Consensus Estimate of $3.61. This compares to earnings of $3.53 per share a year ago. These figures are adjusted for non-recurring items. This quarterly report represents an earnings surprise of 3.60%.

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