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Legg Mason (LM) Up 26.1% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Legg Mason (LM - Free Report) . Shares have added about 26.1% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Legg Mason 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 catalysts.

Legg Mason's Q3 Earnings Beat Estimates on High Revenues

Legg Mason reported a positive earnings surprise of 8.4% in third-quarter fiscal 2020 (ended Dec 31). The company recorded adjusted net income of $1.03 per share, outpacing the Zacks Consensus Estimate of 95 cents. Further, the reported figure climbed 19.8% year over year.

Higher AUM, top-line strength and disciplined expense management drove the company’s performance. However, equity outflows were a major drag during the quarter.

Including certain one-time items, Legg Mason recorded net income of $74.8 million or 83 cents per share as against the net loss of $216.9 million or $2.55 per share reported in the year-ago quarter.

Revenues Up, Expenses Drop

Legg Mason’s total adjusted operating revenues in the fiscal third quarter came in at $638.9 million, up 8.6% year over year. Including certain items, operating revenues were $753.9 million, up 7% year over year. This upsurge mainly resulted from increased advisory fee revenues and performance fees. Also, the revenue figure outpaced the Zacks Consensus Estimate of $732.2 million.

Investment advisory fees climbed 8.6% year over year to $685 million in the quarter. Yet, distribution and service fees were down 6.4% year over year to $67.6 million. Additionally, other revenues slumped 23.5% year over year to $1.3 million.

Operating expenses slipped 33.7% to $623.9 million on a year-over-year basis. This downside chiefly resulted from lower distribution and other costs, partly offset by higher compensation and benefits.

Non-operating expense came in at $5.3 million, plummeting 82.5% year over year.

Adjusted operating margin of Legg Mason was 26.5% in the December-end quarter, up from the 22.1% recorded in the prior-year quarter.

Assets Position

As of Dec 31, 2019, Legg Mason’s AUM was $803.5 billion, up 10.5% year over year from $727.2 billion. Of the total AUM, fixed income constituted 56%, equity 27%, liquidity 8% and alternatives represented 9%.

Moreover, AUM ascended 2.8% on a sequential basis from the $781.8 billion as of Sep 30, 2019, driven by an encouraging market performance of $20.9 billion and positive foreign exchange of $3 billion. These were partly countered by long-term outflows of $1.6 billion and $0.6 billion in realizations.

Notably, long-term flows included equity outflows of $4.8 billion, partly offset by fixed income inflows of $1.7 billion and alternative inflows of $1.5 billion.

Additionally, average AUM was $791.7 billion compared with the $739.3 billion witnessed in the year-earlier quarter and $779.8 billion in the previous quarter.

Strong Balance Sheet

As of Dec 31, 2019, Legg Mason had $823.7 million in cash. Total debt was $2 billion. Shareholders’ equity came in at $3.8 billion.

The ratio of total debt to total capital (total equity plus total debt excluding consolidated investment vehicles) was 34% compared with the previous quarter’s 35%.

Outlook

For fourth-quarter fiscal 2020, management estimates non-pass-through performance fees of $5-$10 million and pass-through performance fees at around $6 million.

In fourth-quarter fiscal 2020, comp ratio is expected to decrease to 53-55%, despite some seasonality.

In fiscal 2019, Legg Mason initiated a strategic restructuring to reduce costs, which is expected to be substantially complete by the end of fiscal 2021. Restructuring costs include charges for consolidating leased office space and other costs, including professional fees. Legg Mason estimates to incur total strategic restructuring costs of $125-$135 million through March 2021 that are expected to result in future cost savings of around $100 million or more.

Notably, in the third quarter of fiscal 2020, management reported $20 million of savings with cumulative savings realized around $49 million. An additional $22-million savings is anticipated in Q4. This will bring cumulative savings to approximately $71 million by the end of fiscal 2020.

In terms of cost to achieve these savings, management recorded $18 million in the fiscal third quarter and expects an additional $14 million in Q4. For fiscal 2020, management anticipates costs of $80-$85 million with additional costs of about $35-$40 million in fiscal 2021.

The company expects tax rate to be in the range of 26% to 28% in fiscal 2020. The cash tax rate is expected to be below 10% for the next four to five years.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision flatlined during the past month.

VGM Scores

Currently, Legg Mason has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Legg Mason has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.


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