We are maintaining our Neutral recommendation on
Legg Mason Inc.
) based on its strong fiscal first-quarter 2013
earnings, which topped the Zacks Consensus Estimate.
However, asset outflows remain a concern with aggregate net client
outflows of $2.6 billion and dispositions of $4.6 billion at the
end of the quarter.
In July, Legg Mason reported fiscal first quarter 2013 adjusted
earnings of 64 cents per share, significantly outpacing the Zacks
Consensus Estimate of 2 cents. However, results were well below the
prior-quarter earnings of 88 cents per share.
The decline in operating expenses and reduction in outstanding debt
were the positives for the quarter. Yet, a dropp in total
revenues and client outflows were the headwinds.
Legg Mason has been working on improving its operating efficiencies
through its key initiatives, which include cost cutting, innovative
product solutions, tapping sound investment capacities and
expanding distribution relationships. In the fourth quarter fiscal
2012, Legg Mason completed the streamlining initiative
announced in May 2010 in order to drive increased profitability and
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
repurchases and dividend payments. Additionally, during the fiscal
first quarter, Legg Mason announced a new capital plan, which
enhanced financial flexibility and poised the company well for
sustained growth. Based on these efforts, outstanding debt was
reduced by $350 million.
On the flip side, 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 descent in the equity markets. Moreover,
during the reported quarter, 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 it can
have on the company's results remains ambiguous.
Therefore, the current volatility in the financial markets along
with governmental regulations heightens the chance 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 to inspire investor
confidence in the stock.
Furthermore, 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.
Among the company's peers -
) also retains a Zacks #3 Rank.
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