Driven by top-line growth, Legg Mason Inc. LM delivered a positive earnings surprise of 1.79% in the first-quarter of fiscal 2016 (ended Jun 30). Adjusted earnings of $1.14 per share outpaced the Zacks Consensus Estimate by 2 cents. Also, the reported figure came above the year-ago adjusted earnings of 91 cents per share.
Better-than-expected results reflected higher revenues, partially offset by elevated expenses. Yet, decreased assets under management (AUM) reflecting negative market performance, partially offset by long-term net inflows were the headwinds.
Adjusted income came in at $129.3 million, compared with $107.2 million in the prior-year quarter. Including one-time items, Legg Mason reported net income of $94.5 million or 84 cents per share for fiscal first-quarter, compared with a net income of $72.2 million or 61 cents in the prior-year quarter.
Performance in Detail
Legg Mason’s total operating revenue came in at $708.6 million, up 2% year over year. The rise was due to higher investment advisory fees that came on the back of increased performance fees and higher fees from separate accounts and funds. Also, revenues came in ahead of the Zacks Consensus Estimate of $703 million.
Investment advisory fees climbed 1.4% year over year to $611.1 million in the quarter. Also, distribution and service fees were up 8% year over year to $96.9 million. However, other revenues declined 53% year over year to $0.69 million.
Operating expenses increased 1.7% to $584.1 million on a year-over-year basis. The rise was primarily due to higher costs related to compensation and benefits along with the net impact of acquisitions and dispositions and investments made in retail global distribution business. Notably, the reported quarter as well as the prior-year quarter included certain non-recurring items.
Adjusted operating margin of Legg Mason was 22.6%, down from 22.9% in the prior-year quarter.
Assets Position
As of Jun 30, 2015, Legg Mason’s AUM was $699.2 billion, down 1% year over year from $704.3 billion. Of the total AUM, fixed income constituted 53%, equity 28% and liquidity 19%.
Equity outflows were around $1.3 billion, while fixed income and liquidity inflows were around $2.6 billion and $2.3 billion, respectively, for the quarter. Additionally, average AUM was $703.9 billion, compared with $691.3 billion in the prior-year quarter.
Balance Sheet
As of Jun 30, 2015, Legg Mason had $530 million in cash, down from $670 million in the prior quarter. Total debt was $1.1 billion, in line with the prior quarter. Shareholders’ equity was $4.5 billion, also at par with the prior quarter.
The ratio of total debt to total capital (total equity plus total debt excluding consolidated investment vehicles) was 19%, in line with the prior quarter.
Capital Deployment Update
The company repurchased 1.3 million shares in the reported quarter. Notably, Legg Mason retired 0.4 million shares under net share settlements of annual deferred compensation award vesting, while as part of annual incentive compensation, 1 million shares of restricted stock units were approved.
Other Development
Legg Mason announced plans to acquire 75% stake in Australia-based specialty asset manager, RARE Infrastructure, Ltd., in Jul 2015. The company seeks to enhance its equity liquid alternative investments offerings with the acquisition. Expected to close in the December-end quarter of 2015, the deal will likely be accretive to the company’s earnings in the next calendar year.
Our Viewpoint
Legg Mason beat estimates in the first quarter of fiscal 2016 and we remain optimistic owing to its improved fundamentals. 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, with strategic acquisitions, restructuring initiatives and cost-cutting measures, we expect operating efficiencies to improve and steady capital deployment activities to continue to boost investor confidence in the stock. Legg Mason currently carries a Zacks Rank #3 (Hold).
Performance of Other Investment Management Firms
BlackRock, Inc. BLK came out with second-quarter adjusted earnings of $4.96 per share, surpassing the Zacks Consensus Estimate of $4.80 for the seventh consecutive quarter; while Ameriprise Financial, Inc.’s AMP second-quarter earnings of $2.33 per share outpaced the Zacks Consensus Estimate of $2.27.
Driven by higher revenues, Federated Investors Inc. FII has delivered a positive earnings surprise of 5.3% for second-quarter 2015. Earnings per share of 40 cents beat the Zacks Consensus Estimate of 38 cents and improved 14.3% over the year-ago quarter.
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