Legg Mason Inc.’s (LM) fourth-quarter 2011 earnings of 77 cents per share significantly outpacing the Zacks Consensus Estimate of 45 cents. Reported quarter results included 7 cents per share in transition-related costs.
Earnings outpaced the prior-year quarter by 8 cents. Results improved due to higher revenue, offset by higher operating expenses coupled with a decline in total assets under management (AUM).
Adjusted net income came in at $117.7 million compared with $110.3 million in the third quarter of 2011 and $111.3 million in the year-ago quarter. Including one-time expenses, net income came in at $69.0 million.
For fiscal 2011, earnings reported were $439.2 million or 2.83 per share compared with $381.3 million or $2.45 per share in the prior year. The fiscal results also significantly surpassed the Zacks Consensus Estimate of $1.65 per share. Including one-time expenses, net income for fiscal year 2011 was $253.9 million or $1.63 per diluted share.
Performance in Detail
During the reported quarter, Legg Mason’s total revenue was $713.4 million, up 6.0% year over year due to augmented advisory fee yields attributed to favorable asset mix, partly offset by a decline in average AUM and lower performance fees.
On a sequential basis, revenues slipped 1.0% due to low performance fees and a short period of two days in the quarter, partially offset by improved advisory fee yield. Revenues outshined the Zacks Consensus Estimate of $710.0 million.
For fiscal 2011, total revenue was $2.8 billion, up 6.0% year over year, reflecting higher advisory fee yield due to a more favorable asset mix and better performance fees, partially offset by decline in average AUM. However, revenue was in line with the Zacks Consensus Estimate.
In fourth-quarter 2011, Investment Advisory fees increased 7.4% on a year-over-year basis but decreased 1.4% sequentially to $616.2 million. Distribution and Service fees inched down 1.1% year over year and 0.5% sequentially to $95.0 million. Other revenues were up 64.3% year over year and 77.0% sequentially to $2.3 million.
GAAP operating margin of Legg Mason improved to 13.9% in the reported quarter from 13.4% in the prior quarter but dropped from 15.8% in the prior-year quarter. Operating expenses plummeted 2.0% sequentially to $614.3 due to lower transition-related costs related to streamlining initiative. However, expenses increased 9.0% year over year partly due to higher compensation and benefits costs.
As of March 31, 2011, Legg Mason’s AUM was $677.6 billion, up 0.9% sequentially from $671.8 billion driven by market appreciation, partly offset by net outflows of $8.7 billion. On a year-over-year basis, AUM was down 1.0% from $684.5 billion. Fixed income represented 53% of consolidated AUM as of March 31, 2011, liquidity represented 19% and equity comprised 28%.
During the quarter, fixed income outflows were approximately $6.7 billion, liquidity outflows were $0.7 billion and equity outflows were $1.3 billion. Total client outflows decreased to $8.7 billion from $16.7 billion in the third quarter of 2011. For fiscal 2011, total client outflows decreased to $61.1 million compared with $82.0 million in the prior year.
Besides, average AUM was $673.5 billion, up 0.2% from $672.4 billion in the prior quarter, but declined 1.1% from $681.2 billion in the year-ago quarter. For fiscal year 2011, average AUM was $669.3 billion compared with $675.5 billion in the prior year.
As of March 31, 2011, Legg Mason had approximately $1.4 billion in cash compared with $1.3 billion in the prior quarter, while total debt was $1.5 billion, up from $1.4 billion in the third quarter of 2011. Shareholders’ equity was $5.8 billion. The ratio of total debt to total capital (total equity plus total debt excluding consolidated investment vehicles) was also 20%, in line with the third quarter of 2011.
Share Repurchase and Dividend Update
In fiscal year 2011, Legg Mason had repurchased and retired 14.6 million shares of common stock. In the fourth quarter of 2011, Legg Mason completed additional open market purchases of 2.0 million shares.
Legg Mason’s board declared a quarterly cash dividend of 8 cents per share on its common stock. The dividend is payable on July 11, 2011 to shareholders of record as of June 14, 2011.
Performance by Competitors
In Legg Mason’s peer group, Charles Schwab Corporation’s (SCHW) earnings as of March 31, 2011 came in at 20 cents per share, a penny ahead of the Zacks Consensus Estimate of 19 cents. This also compares favorably with the year-ago quarter’s earnings of 11 cents.
Charles Schwab’s results benefited from improved revenue and increase in interest-earnings assets. Additionally, fall in non-interest expenses was also a positive for the company.
Our Take
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 demographics in the market. 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 leverage to improve, and share buybacks to continue inspiring investors’ confidence on the stock.
Legg Mason currently retains its Zacks #3 Rank, which translates to a short-term Hold rating. Considering the fundamentals, we are maintaining a Neutral recommendation on the stock.
LEGG MASON INC (LM): Free Stock Analysis Report
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