Legg Mason Inc. LM reported positive earnings surprise of 22.9% in fourth-quarter fiscal 2018 (ended Mar 31). The company reported adjusted net income of 86 cents per share, outpacing the Zacks Consensus Estimate of 70 cents. Moreover, results improved 13.2% year over year.
Top-line strength and steady assets under management (AUM) were the tailwinds. However, rise in expenses remain a major drag.
Legg Mason reported net income of $76.3 million compared with $75.9 million recorded in the year-ago quarter.
Including certain one-time items, for fiscal 2018, net income came in at $352.1 million or $3.72 per share compared with $227.3 million or $2.18 per share in the prior fiscal.
Revenues Rise, Expenses Flare Up
For fiscal 2018, Legg Mason reported total revenues of $3.1 billion, up 9% year over year, reflecting higher average long-term AUM, along with elevated non-pass through as well as pass-through performance fees. Revenues came in almost in line with the Zacks Consensus Estimate.
Legg Mason’s total operating revenues in the quarter came in at $785.1 million, up 9% year over year. The upsurge was mainly due to elevated average long-term AUM and non-pass performance fees, as well as higher pass-through performance fees. In addition, revenues outpaced the Zacks Consensus Estimate of $759.3 million.
Investment advisory fees increased 11.3% year over year to $702.6 million in the quarter. Further, other revenues surged 66.7% year over year to $1.5 million. However, distribution and service fees were down 10.7% year over year to $80.9 million.
Operating expenses rose 1% to $618.3 million on a year-over-year basis. The rise was chiefly due to higher compensation and benefits expenses, other expenses, and communications and technology expenses.
Adjusted operating margin of Legg Mason was 23.8%, up from 20.6% recorded in the prior-year quarter.
Solid Assets Position
As of Mar 31, 2018, Legg Mason’s AUM was $754.1 billion, up 3.5% year over year from $728.4 billion. Of the total AUM, fixed income constituted 56%, equity 27%, liquidity 8% and alternatives represented 9%.
Nevertheless, AUM edged down 1.7% sequentially from $767.2 billion as of Dec 31, 2017, impacted by negative market performance, and other of $3.1 billion and realizations of $0.5 billion. Furthermore, long-term inflows of $1.2 billion were offset by liquidity outflows of $10.7 billion. However, positive foreign exchange of $2.9 billion was a favorable factor.
Notably, long-term net inflows of $2.1 billion included equity outflows of $3.2 billion, offset by fixed income inflows of $2.8 billion and alternative inflows of $0.5 billion. Additionally, average AUM was $766.9 billion compared with $718.9 billion witnessed in the prior-year quarter, and $759.9 billion in the previous quarter.
Strong Balance Sheet
As of Mar 31, 2018, Legg Mason had $736.1 million in cash. Total debt was $2.4 billion, including $100-million revolver repayment in March 2018. Shareholders’ equity came in at $3.9 billion.
The ratio of total debt to total capital (total equity plus total debt excluding consolidated investment vehicles) was 38%, down from 39% in the prior quarter.
Capital Deployment Update
In the reported quarter, Legg Mason did not retired shares as accelerated repurchases occurred in the prior quarter.
Concurrent with the earnings release, Legg Mason announced a hike in its quarterly common stock dividend to 34 cents per share, up 21.4%. The new dividend will be paid on Jul 9 to shareholders on record as of Jun 12, 2018.
Our Viewpoint
We believe Legg Mason has the potential to outperform its peers over the long run, given its diversified product mix and leverage in the changing market demography. In addition to these, with strategic acquisitions, restructuring initiatives and cost-cutting measures, we anticipate operating efficiencies to improve. Also, steady capital-deployment activities continue to boost investors’ confidence in the stock. However, escalating expenses remain a key concern.
Legg Mason, Inc. Price, Consensus and EPS Surprise
Legg Mason, Inc. Price, Consensus and EPS Surprise | Legg Mason, Inc. Quote
Legg Mason currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Competitive Landscape
BlackRock’s BLK first-quarter 2018 adjusted earnings came in at $6.70 per share, which handily outpaced the Zacks Consensus Estimate of $6.42. Additionally, the bottom line came in 28% higher than the year-ago quarter. Results benefited from an improvement in revenues, rise in AUM and steady long-term inflows. However, increase in operating expenses acted as a headwind.
Ameriprise Financial’s AMP first-quarter adjusted operating earnings per share of $3.70 comfortably surpassed the Zacks Consensus Estimate of $3.47. Also, the figure came in 37% higher than the year-ago quarter level. Results benefited from an improvement in revenues. Also, growth in AUM and assets under administration (AUA) supported the earnings. However, a rise in expenses was an undermining factor.
T. Rowe Price Group TROW reported earnings per share of $1.77 for first-quarter 2018, which lagged the Zacks Consensus Estimate of $1.78. Further, the bottom line improved 14.9% from the year-ago figure of $1.54. First-quarter results reflect escalating expenses. However, higher revenues and AUM were the positive factors. Also, the company’s strong balance-sheet position, along with ample liquidity, was the other tailwind.
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