We have downgraded our recommendation on
Legg Mason Inc.
) to Underperform from Neutral, primarily based on the company's
ongoing managerial changes. Moreover, asset outflows remain a
concern, though it improved in the last two months with aggregate
net client outflows of $27.5 billion and dispositions of $23.9
billion as of June 30, 2012.
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Amid ongoing economic instability, the stepping down of CEO Mark R.
Fetting could be a challenge for the company. Fetting joined Legg
Mason in early 2008, at the peak of the financial crisis and worked
towards lessening the company's troubles. However, the performance
of Legg Mason's funds has remained mixed since then and its shares
did not rebound as compared with its competitors. Therefore, it
could be difficult for the new CEO to help the company recover
Further, challenging and volatile conditions lingered throughout
the first quarter of fiscal 2013. Economic uncertainties related to
the European debt crisis slowed the global economy and contributed
to a sharp decline in the equity markets. Moreover, the Federal
Reserve Board continued to hold the federal funds rate at 0.25%,
the lowest in history. Economic challenges are expected to persist
and the impact on the company's results due to such irregularities
On the flip side, Legg Mason is focused on increasing its operating
efficiency. In fourth quarter fiscal 2012, Legg Mason completed the
business model streamlining initiative announced in May 2010 to
drive higher profitability and growth. The initiative resulted in
annual cost savings of over $140 million, which will be fully
realized on an annual basis during 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.
We believe 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. However, in the near term, assets
outflows are expected to remain a significant headwind, though
operating efficiencies are expected to improve. Moreover, the
changes in management might affect the performance of the company
in the near term, though it is expected to be beneficial in the
Legg Mason currently retains a Zacks #5 Rank, which translates into
a short-term 'Strong Sell rating. However, one of its peers -
) retains a Zacks #2 Rank (a short-term Buy rating).