We maintain our Neutral recommendation on
Legg Mason Inc.
) based on its strong cash position and ongoing success of its
targeted streamlining plan. However, asset outflows remain a
concern with aggregate net client outflows of $22.6 billion and
dispositions of $20.8 billion for the nine months ended December
In January, Legg Mason reported fiscal third-quarter 2012
earnings of 55 cents per share significantly outpacing the Zacks
Consensus Estimate of 27 cents per share. Including one-time
expenses of $42.3 million related to the transition costs in the
quarter, net income came in at $28.1 million or 20 cents per
Quarterly earnings were below the prior-year quarter and prior
quarter's earnings of 73 cents and 61 cents per share,
respectively. Results declined on a year-over-year basis, due to
lower revenue, partially muted by lower operating expenses.
Moreover, reduced assets under management (AUM) were on the
downside. Sequentially, benefits from AUM improved were offset by
increased operating expenses.
Legg Mason has been strongly 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
May 2010, the company announced an initiative to streamline its
business model and reduce its costs. Notably, in 2011, the company
completed the most significant phase of its plan.
The plan, which is scheduled to be completed in fiscal 2012,
projects $140 million in expense reductions. 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 30% hike in dividend in May 2011.
Additionally, Legg Mason completed its plan to buyback $400
million worth of common stock by the end of fiscal 2012. We expect
such measures to instill investors' confidence on the stock of the
On the flip side, though, during the third quarter of fiscal
2012, the financial environment in the U.S. began to recover from
concerns regarding economic issues related to the European debt
crisis and the unprecedented downgrade to the U.S. credit rating,
overall decline in the equity markets was recorded over the nine
months ended December 31, 2011.
Therefore, the current volatility in the financial markets along
with the government regulations increases the chances of interest
rate fluctuations in the funds business of the company. In addition
to that, economic challenges are expected to linger.
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. Assets outflows
remain a significant headwind in the near term, though trying to
improve in the volatile markets.
Yet considering the restructuring initiatives and cost-cutting
measures, we expect operating leverage to improve. Share buybacks
will also continue inspiring investors' confidence in the
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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