Legg Mason Inc.’s (LM) fiscal first-quarter 2012 earnings of 73 cents per share significantly outpaced the Zacks Consensus Estimate of 39 cents. Reported quarter results included 6 cents per share in transition-related costs and 5 cents per share of expenses related to closed-end fund launch.
Earnings outpaced the prior-year quarter by 4 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 $109.1 million compared with $117.7 million in the fourth quarter of 2011 and $96.3 million in the year-ago quarter. Including one-time expenses, net income came in at $60.0 million or 40 cents per share.
Performance in Detail
During the reported quarter, Legg Mason’s total revenue was $717.1 million, up 6.0% year over year due to augmented advisory fee yields resulting from favorable asset mix, partly offset by lower performance fees.
On a sequential basis, revenues surged up 1.0% due to one additional day in the quarter, partially offset by low performance fees and a decline in average AUM. However, revenues were below the Zacks Consensus Estimate of $724.0 million.
In first-quarter 2012, Investment Advisory fees climbed 8.2% on a year-over-year basis and 1.2% sequentially to $623.5 million. Distribution and Service fees inched down 4.4% year over year and 3.1% sequentially to $92.1 million. Other revenues were up 7.1% year over year and down 34.8% sequentially to $1.5 million.
GAAP operating margin of Legg Mason improved to 14.0% in the reported quarter from 13.9% in the prior quarter but dropped from 15.2% in the prior-year quarter. Operating expenses surged up 0.4% sequentially to $614.3 due to costs related to closed-end fund launch and higher compensation and benefits costs. Moreover, expenses increased 8.0% year over year partly due to elevated compensation and benefits costs.
As of June 30, 2011, Legg Mason’s AUM was $662.5 billion, down 2.2% sequentially from $677.6 billion, driven by dispositions and client outflows of $3.7 billion, partly offset by market appreciation. On a year-over-year basis, AUM was up 3.0% from $645.4 billion. Fixed income represented 55% of consolidated AUM as of June 30, 2011, liquidity represented 18% and equity comprised 27%.
During the quarter, fixed income inflows were approximately $0.1 billion, liquidity inflows were $2.0 billion and equity outflows were $5.8 billion. Total client outflows decreased to $3.7 billion from $8.7 billion in the first quarter of fiscal 2012. Besides, average AUM was $670.8 billion, down 0.4% from $673.5 billion in the prior quarter, but increased 0.4% from $668.3 billion in the year-ago quarter.
As of June 30, 2011, Legg Mason had approximately $1.2 billion in cash compared with $1.4 billion in the prior quarter, while total debt was $1.4 billion, down from $1.5 billion in the fourth quarter of 2011. Shareholders’ equity was $5.7 billion.
The ratio of total debt to total capital (total equity plus total debt excluding consolidated investment vehicles) was 19%, down from 20% in the prior quarter, reflecting retirement of debt through issue of shares.
Share Repurchase and Dividend Update
In first quarter of 2012, Legg Mason had repurchased and retired 6.0 million shares of common stock.
Legg Mason’s board declared a quarterly cash dividend of 8 cents per share on its common stock. The dividend is payable on October 24, 2011 to shareholders of record as of October 6, 2011.
Performance by Competitors
In Legg Mason’s peer group, T. Rowe Price Group Inc.’s (TROW) second-quarter 2011 earnings of 76 cents per share were significantly up from 59 cents reported in the prior-year quarter. Higher-than-expected top-line growth and higher assets under management (AUM), partially offset by higher operating expenses, cumulated in improved performance. However, the quarter’s earnings were below the Zacks Consensus Estimate by a penny.
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.
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