We have upgraded our recommendation on
Legg Mason Inc.
) to Neutral from Underperform attributable to the recent
acquisition of Fauchier Partners. Moreover, the company reported
strong fiscal second quarter 2013 earnings, which significantly
outpaced the Zacks Consensus Estimate.
Legg Mason's second quarter 2013 adjusted earnings of 75 cents
per share were up from the Zacks Consensus Estimate by 19 cents.
Moreover, earnings were well above the prior-quarter figure of 64
cents per share. Better-than-expected results reflected higher
top-line growth, aided primarily by improved investment advisory
fees and other revenues. Yet, elevated operating expenses acted
as a dampener.
The company also reported a slight rise in its assets under
management (AUM) for the month of November 2012, compared with
the prior month. Preliminary quarter-end AUM came in at $648.3
billion, up 0.4% compared with the prior month. Equity AUM and
Fixed Income AUM were down, though liquidity AUM advanced.
With the aim of expanding globally and to provide exceptional
services to its clients, Legg Mason and its affiliate, Permal
Group, announced the acquisition of London-based
fund-of-hedge-funds firm - Fauchier Partners from BNP Paribas
Investment Partners in December 2012. Moreover, the acquisition
is anticipated to be accretive to Legg Mason's earnings in the
first year, reflecting management's continuing assurance to
create shareholder value.
While the financial environment in the United States remained
uncertain during the first half of fiscal 2013, positive news
related to increased consumer confidence, decline in
unemployment, and growth in manufacturing indicated towards a
rebound in the economy, though at a slow rate. However, during
the reported quarter, the Federal Reserve Board continued to hold
the federal funds rate at 0.25%, the lowest in history.
Therefore, economic challenges are expected to persist and the
impact on the company's results due to such uncertainties is
We believe that the risk-reward profile of Legg Mason is
currently balanced and hence, we upgraded our recommendation to
Neutral. Moreover, 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. Though, in the near
term, assets outflows remain a significant headwind, the
restructuring initiatives, the recent acquisition and
cost-cutting measures are expected to improve operating
Legg Mason currently retains a Zacks #3 Rank, which translates
into a short-term Hold rating.
) is another Zacks #3 Rank in the same industry.
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