The Baltimore, MD-based asset manager's second-quarter fiscal 2017 earnings reported positive earnings surprise of 8.6%. Moreover, the bottom line exhibited an 8.6% improvement from the year-ago quarter. Increased revenues and higher assets under management (AUM) were the primary drivers. Rise in operating expenses was on the downside.
Legg Mason has a decent surprise history, with two positive earnings surprises in the trailing four quarters. Regarding the stock's performance, the company has gained just 5.1% as compared with the Zacks categorized Investment Management industry's 17.1% growth.
Legg Mason, Inc. Price and EPS Surprise
Will the upcoming earnings release put further stress on Legg Mason's stock? Notably, the Zacks Consensus Estimate of 64 cents per share for the fiscal third quarter indicates a year-over-year plunge of about 56%.
Our proven model does not conclusively show that Legg Mason is likely to beat the Zacks Consensus Estimate in the third quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold) for this to happen.
Unfortunately, this is not the case here as elaborated below. We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.
Zacks ESP: The Earnings ESP for Legg Mason is 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 64 cents. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .
Zacks Rank: Legg Mason's Zacks Rank #3 increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of an earnings beat.
What to Expect in Fiscal Q3
The Oct-Dec quarter in 2016 recorded a strong performance of equity markets. The S&P 500 Index gained 3.8% in the quarter. However, the index measuring international equity performance - the MSCI EAFE Index - edged down around 0.68% during the quarter.
The company reported a decrease in its AUM for the Oct-Dec 2016 quarter. Quarter-end AUM was $710.4 billion, down 3.1% from Sep 2016. The December quarter's AUM displayed $0.6 billion of equity outflows, alternative outflows of $0.2 billion and liquidity outflows of $0.6 billion, partially offset by fixed income inflows of $0.5 billion. Negative foreign exchange impact of about $1.1 billion was an unfavorable factor.
Despite the global uncertainties and market volatility that prevailed in the quarter, we believe Legg Mason's diversified nature of business will supplement its results. Additionally, several acquisitions made will continue lending support to Legg Mason's upcoming results.
Notably, management projects performance fees to range from $10-$20 million. Further, acquisition and transition-related expenses are expected to range from $5-$7 million in the to-be-reported quarter.
Compensation and benefits ratio for the quarter is anticipated to decline to the range of 52-54%.
Stocks That Warrant a Look
Here are some stocks you may want to consider, as our proven model shows that these have the right combination of elements to post an earnings beat this quarter:
The Earnings ESP for Waddell & Reed Financial, Inc. WDR is +14.63% and it carries a Zacks Rank #3. The company is scheduled to release fourth-quarter results on Jan 31. You can see the complete list of today's Zacks #1 Rank stocks here.
Evercore Partners Inc. EVR has an Earnings ESP of +4.48% and a Zacks Rank #3. It is expected to report fourth-quarter 2016 results on Feb 1.
The Earnings ESP for CME Group Inc. CME is +1.85% and it carries a Zacks Rank #2. The company is slated to release fourth-quarter results on Feb 2.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.