We maintain our Neutral recommendation on
Legg Mason Inc.
), based on its strong cash position and the successful completion
of its streamlining efforts. However, asset outflows remain a
concern with aggregate net client outflows of $27.5 billion and
dispositions of $23.9 billion in the year ended fiscal 2012.
In May, Legg Mason reported fiscal fourth-quarter 2012 earnings
of 88 cents per share, significantly outpacing the Zacks Consensus
Estimate of 48 cents per share. Including one-time expenses, net
income came in at $76.1 million or 54 cents per share.
Quarterly earnings were well above the prior quarter's earnings
of 55 cents per share. The upbeat performance was attributed to
higher revenues aided by rise in investment advisory, distribution
and services fees, partially offset by increased operating
expenses. Improved AUM was also a positive for the quarter.
Legg Mason has been working on improving its operating
efficiencies through its key initiatives that include cost cutting,
innovative product solutions to client base, tapping sound
investment capacities and expanding distribution relationships. In
fourth-quarter fiscal 2012, Legg Mason completed the business model
streamlining initiative announced in May 2010 to drive increased
profitability and growth.
The initiative resulted in annual cost savings of over $140
million, which will be fully realized on an annual basis, beginning
fiscal 2013. These initiatives are expected to create value for
clients and shareholders.
Moreover, Legg Mason remains committed to increasing
shareholder's wealth. The company is effectively deploying capital
through share repurchase and dividend payment. The company utilized
its cash by announcing a 37.5% hike in dividend in April 2012.
On the flip side, although the financial environment, both
globally and in the U.S., continued to rebound during fiscal 2012,
challenging and volatile conditions lingered throughout a portion
of fiscal year 2013. During fiscal 2012, the Federal Reserve Board
held the federal funds rate at 0.25%, the lowest in history. While
the economic outlook has been substantially positive than in recent
years, the financial environment continues to be challenging in
Therefore, the current volatility in the financial markets along
with governmental regulations heightens the chances of interest
rate fluctuations in the funds business of the company.
However, we believe that Legg Mason has the potential to
outperform its peers in the long run, given its diversified product
mix and leverage to the changing market demography. Asset outflows
remain a significant headwind in the near term, though efforts to
reduce outflows in the volatile markets are underway.
Yet, considering the restructuring initiatives and cost-cutting
measures, we expect operating leverage to improve. Share buybacks
and dividend increases will continue inspiring investors'
confidence in the stock.
Further, we believe that the risk-reward profile of Legg Mason
is currently balanced and hence, we have reiterated our Neutral
recommendation on its shares. Legg Mason currently retains its
Zacks #3 Rank, which translates into a short-term 'Hold' rating.
The company's closest competitor -
) also retains a Zacks #3 Rank.
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