Legg Mason Inc.
) fiscal first quarter 2013 adjusted earnings of 64 cents per share
significantly outpaced the Zacks Consensus Estimate of 2 cents.
However, earnings were well below the prior-quarter earnings of 88
cents per share.
A decrease in operating expenses reflecting quarterly savings
related to the company's streamlining program and reduction in
outstanding debt were the positives for the quarter. Yet, decline
in total revenues and client outflows were the dampeners.
Adjusted net income came in at $88.6 million compared with $123.6
million in the prior quarter. Including one-time items, net loss
came in at $9.5 million or 7 cents per share.
Performance in Detail
During the reported quarter, Legg Mason's total revenue was $630.7
million, down 3% sequentially, impacted by decrease in average AUM,
including a less favorable asset mix and lower performance fees.
Moreover, revenues were also below the Zacks Consensus Estimate of
Investment Advisory fees decreased 3% sequentially to $547.5
million. Distribution and Service fees declined 1% sequentially to
$81.6 million. However, other revenues were up 6.7% sequentially to
Operating expenses declined 3.8% sequentially to $554.6 million,
attributed to fall in compensation and benefits, partly offset by
higher distribution and servicing expenses and quarterly savings
related to the company's streamlining program.
Adjusted operating margin for Legg Mason declined to 16.9% in
the quarter under review from 21.0% in the prior quarter, mainly
reflecting elevated costs related to fund launches in the quarter.
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As of June 30, 2012, Legg Mason's AUM was $631.8 billion, down 1.8%
sequentially from $643.3 billion, driven by dispositions of $4.6
billion, market depreciation of $4.3 and client outflows of $2.6
billion. Fixed income represented 57% of consolidated AUM as of
June 30, 2012, liquidity represented 19% and equity comprised 24%.
During the quarter, fixed income inflows were about $100 million
and liquidity inflows were $1.2 billion. However, equity outflows
were $3.9 billion. Average AUM was $635.5 billion compared with
$670.8 billion in the prior quarter.
As of June 30, 2012, Legg Mason had approximately $0.8 billion in
cash, compared with $1.4 billion in the prior quarter, while total
debt was stable at $1.2 billion, down from $1.4 billion in the
prior quarter. Shareholders' equity was $5.5 billion, down from
$5.7 billion in the previous quarter.
The ratio of total debt to total capital (total equity plus total
debt excluding consolidated investment vehicles) was 17%, down from
20% in the previous quarter. The improved ratio indicates the
repurchasing of $1.25 billion in debt held by a fund which is
Kohlberg Kravis Roberts & Co. L.P.
) in May. Moreover, the company has issued $650 million of 5.5%
senior notes due 2019 to finance its KKR debt buyback.
These actions reduced outstanding debt obligations by $350 million.
We believe these strategic initiatives would help Legg Mason in
strengthening its balance sheet and enhancing its capital
Capital Deployment Update
During the quarter, Legg Mason repurchased 6.2 million shares.
Moreover, Legg Mason's Board declared a quarterly cash dividend of
11 cents per share. The dividend will be paid on October 22, 2012
to shareholders of record as of October 4, 2012.
One of Legg Mason's peers,
T. Rowe Price Group Inc.
), reported second quarter 2012 net income of 79 cents per share,
missing the Zacks Consensus Estimate by a penny. However, earnings
compare favorably with 76 cents reported in the prior-year quarter.
Higher-than-expected top line growth was a positive for the
quarter. Yet, elevated operating expenses were a dampener.
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 will remain a significant headwind. Yet with the
restructuring initiatives and the cost-cutting measures, we expect
operating efficiencies to improve, and dividend payments to
continue to inspire investors' confidence in the stock.
Shares of Legg Mason currently retain a Zacks #3 Rank, which
translates into a short-term Hold rating. Considering the
fundamentals, we also maintain a Neutral recommendation on the