Riding on higher revenues, Legg Mason Inc.’s (LM) fiscal first-quarter 2015 adjusted earnings came in at 91 cents per share, beating the Zacks Consensus Estimate by 5 cents. Earnings were significantly higher than the year-ago figure of 68 cents per share.
Better-than-expected results were due to top-line growth and decreased operating expenses. Further, increased assets under management (AUM) were a positive. However, net outflows remain a concern.
Adjusted net income came in at $107.2 million, compared with $85.2 million in the prior-year quarter. Including one-time items, Legg Mason reported net income of $72.2 million or 61 cents per share, compared with $47.8 million or 38 cents in the prior-year quarter.
Recently, Legg Mason announced the acquisition of UK-based international equity specialist firm Martin Currie. Financial terms of the deal were not disclosed. At the close of the transaction, which is expected in the fourth quarter of calendar year 2014, Martin Currie, with AUM worth $9.8 billion as of Jun 30, 2014, will serve as a core independent investment partner of Legg Mason. Other existing affiliates include Brandywine Global, ClearBridge Investments, The Permal Group, QS Investors, Royce & Associates and Western Asset Management.
Performance in Detail
Legg Mason’s total revenue came in at $693.9 million, up 4% year over year. The rise was due to an increase in average long-term AUM, partly offset by lower performance fees. However, revenues lagged the Zacks Consensus Estimate of $714.0 million.
Investment Advisory fees climbed 6.1% year over year to $619 million. Distribution and Service fees rose 5.7% to $89.7 million. Yet, other revenues decreased 25% year over year to $1.5 million.
Operating expenses fell 2.1% to $574.3 million on a year-over-year basis. The decline was primarily due to decreased distribution and servicing related expenses, partially offset by higher compensation and benefits.
Adjusted operating margin of Legg Mason was 22.9%, up from 17.9% in the prior-year quarter.
Assets Position
As of Jun 30, 2014, Legg Mason’s AUM was $704.3 billion, up 9% year over year from $644.5 billion. AUM rose slightly on a sequential basis from $701.8 billion as of Mar 31, 2014.
The upsurge was driven by an $18.5 billion increase in market performance, foreign exchange and other, increase in AUM related to the QS Investors acquisition worth $5.0 billion along with long-term inflows of $0.7 billion. These were partially offset by $8.9 billion in liquidity outflows along with a $12.8 billion reclassification of certain client assets previously reported as AUM to Assets Under Advisement (AUA).
Of the total AUM, fixed income constituted 52%, liquidity 20% and equity 28%. Equity and liquidity outflows were $1.8 billion and $8.9 billion, respectively, while fixed income inflows were $2.5 billion for the quarter ended Jun 30, 2014.
Balance Sheet
As of Jun 30, 2014, Legg Mason had approximately $1.3 billion in cash, up from $858 million in the prior quarter, while total debt was $1.7 billion, up from $1.1 billion in the prior-quarter. Shareholders’ equity was $4.7 billion, in line with the prior quarter.
The ratio of total debt to total capital (total equity plus total debt excluding consolidated investment vehicles) was 27%, up from 18% in the prior quarter.
Capital Deployment Update
Concurrent with the earnings release, Legg Mason’s board of directors declared a quarterly cash dividend of 16 cents per share. The dividend will be paid on Oct 27, 2014 to shareholders of record as of Oct 9, 2014. Moreover, the company repurchased 1.9 million shares in the said quarter.
Competitive Landscape
Aided by higher revenues, Janus Capital Group Inc. (JNS) reported second-quarter 2014 earnings per share attributable to common shareholders of 19 cents, inching past the Zacks Consensus Estimate by a penny. Moreover, results compared favorably with the prior-year quarter adjusted earnings of 12 cents. Better-than-expected results reflected top-line growth and increased AUM, depicting stability in earnings.
Federated Investors Inc. (FII) reported second-quarter 2014 earnings per share of 35 cents, in line with the Zacks Consensus Estimate. Further, this compared unfavorably with the prior-year quarter earnings of 39 cents. Decrease in expenses and record higher equity assets acted as the tailwinds for the quarter. However, lower top-line performance and decline in AUM were on the downside.
Franklin Resources Inc.’s (BEN) fiscal third-quarter 2014 (ended Jun 30) earnings of 92 cents per share missed the Zacks Consensus Estimate by 4 cents. However, results compared favorably with the prior-year quarter earnings of 86 cents per share. Rise in expenses remained a concern. However, net inflows, top-line growth and a strong capital position were the tailwinds for the quarter.
Our Viewpoint
We believe Legg Mason has the potential to outperform its peers in the long run, given its diversified product mix and leverage in the changing market demography. However, asset outflows will remain a significant headwind in the near term.
Nevertheless, with restructuring initiatives, recent acquisitions and cost-cutting measures, we expect operating efficiencies to improve and dividend payments to continue to boost investors’ confidence in the stock. Legg Mason currently carries a Zacks Rank #3 (Hold).
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