Driven by higher revenues, Legg Mason Inc.’s (LM) fiscal second-quarter 2015 adjusted earnings came in at 35 cents per share, beating the Zacks Consensus Estimate of 33 cents. However, the figure compared unfavorably with the year-ago figure of 85 cents per share.
Better-than-expected results came on the back of higher investment advisory fees as well as distribution and service fees. Further, increased assets under management (AUM) were a positive. However, higher expenses were on the down side.
Adjusted income came in at $40.6 million, compared with $104.5 million in the prior-year quarter.
Net income came in at $4.9 million, or 4 cents per share, compared with $86.3 million, or 70 cents per share in the prior-year quarter. The current quarter results included a charge of $107.1 million, or 59 cents share, related to debt refinancing.
Chairman and CEO of Legg Mason, Joseph A. Sullivan mentioned that in order to avail the opportunity of the current low interest rates, the company refinanced debt. He said, “While this restructuring impacted the current quarter, the resulting decrease in our run-rate interest expense and enhanced financial flexibility will benefit shareholders over the long-term.”
Quarter in Detail
Legg Mason’s total revenue came in at $703.9 million, up 5.1% 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 $707 million.
Investment advisory fees increased 4.5% year over year to $608 million. Distribution and Service fees rose 9.6% to $94.5 million. Yet, other revenues decreased 27.1% year over year to $1.4 million.
Operating expenses increased 1.8% to $573.5 million on a year-over-year basis. The rise was primarily due to higher compensation costs. Also, the current quarter included certain non-recurring expenses including costs related to the QS Investors integration and costs related to the launch of Western Asset Middle Market Income closed-end fund.
Adjusted operating margin of Legg Mason was 23.8%, up from 22.3% in the prior-year quarter.
Assets Under Management
As of Sep 30, 2014, Legg Mason’s AUM was $707.8 billion, up 7.9% year over year from $656.0 billion.
AUM rose slightly on a sequential basis from $704.3 billion as of Jun 30, 2014. The upsurge was driven by net flows of $13.4 billion, which included liquidity inflows of $12.7 billion and long-term inflows of $0.7 billion. These were partially offset by negative market performance along with $9.9 billion of foreign exchange.
Of the total AUM, fixed income constituted 51%, liquidity 22% and equity 27%. The quarter experienced equity inflows of $1.6 billion and fixed income outflows were $0.9 billion.
Balance Sheet
As of Sep 30, 2014, Legg Mason had approximately $659 million in cash, down from $1.3 billion in the prior quarter, while total debt was $1.1 billion, down from $1.7 billion in the prior-quarter. Shareholders’ equity was $4.6 billion, compared with $4.7 billion in the prior quarter.
The ratio of total debt to total capital (total equity plus total debt excluding consolidated investment vehicles) was 19%, down from 27% in the prior quarter. The decline reflects the repayment in July of notes due in 2019.
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 Jan 12, 2015 to shareholders of record as of Dec 17, 2014. Moreover, during the quarter the company repurchased 1.8 million shares in the open market.
Other
On Oct 1, 2014 Legg Mason completed the acquisition of UK-based international equity specialist firm Martin Currie. The transaction is expected to fetch modest benefits in the first year.
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. Further, we expect the company to benefit from its restructuring initiatives and strategic acquisitions.
Legg Mason currently carries a Zacks Rank #3 (Hold).
Competitive Landscape
Strong top-line growth drove BlackRock, Inc.’s (BLK) third-quarter 2014 adjusted earnings of $5.21 per share, which outpaced the Zacks Consensus Estimate of $4.71.
Waddell & Reed Financial Inc.’s (WDR) third-quarter adjusted earnings per share of 94 cents surpassed the Zacks Consensus Estimate by 2 cents aided by consistent improvement in top line.
However, The Blackstone Group L.P.’s (BX) third-quarter economic net income (ENI) of 66 cents per share missed the Zacks Consensus Estimate of 78 cents, due to elevated expenses.
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