A month has gone by since the last earnings report for Legg Mason, Inc. . Shares have lost about 12.8% in the past month, underperforming the market.
Will the recent negative trend continue leading up to its next earnings release, or is LM due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Legg Mason Q3 Earnings Improve, Tax Benefit Recorded
Legg Mason reported third-quarter fiscal 2018 (ended Dec 31) adjusted net income of $1.02 per share, up 59.4% year over year. Results exclude tax benefit of $213.7 million or $2.27 per share, and certain one-time items. The Zacks Consensus Estimate was 84 cents.
Top-line strength and steady AUM were the tailwinds. However, rise in expenses remained a major drag.
Including tax benefit and one-time items, Legg Mason reported net income of $149.2 million or $1.58 per share compared with $51.4 million or 50 cents recorded in the year-ago quarter.
Revenues Rise, Expenses Flare Up
Legg Mason’s total operating revenues in the quarter came in at $793.1 million, up 11% 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 $764.4 million.
Investment advisory fees increased 13.8% year over year to $710 million in the quarter. Further, other revenues climbed 31.2% year over year to $1.64 million. Yet, distribution and service fees were down 9.6% year over year to $81.5 million.
Operating expenses escalated 36% to $820.4 million on a year-over-year basis. The rise was chiefly due to higher compensation and benefits expenses, other expenses and impairment of intangible assets.
Adjusted operating margin of Legg Mason was 27.2%, up from 23.9% recorded in the prior-year quarter.
Solid Assets Position
As of Dec 31, 2017, Legg Mason’s AUM was $767.2 billion, up 8% year over year from $710.4 billion. Of the total AUM, fixed income constituted 55%, equity 27%, liquidity 9% and alternatives represented 9%.
AUM inched up 1.7% sequentially from $754.4 billion as of Sep 30, 2017, driven by upbeat market performance, and other of $13.5 billion, long-term inflows of $2.2 billion and $0.1 billion in acquisitions. These positives were partially offset by liquidity outflows of $2.3 billion, $0.4 billion in negative foreign exchange and realizations of $0.3 billion.
Notably, long-term net inflows of $2.2 billion included equity outflows of $3.2 billion offset by fixed income inflows of $5.4 billion. Additionally, average AUM was $759.9 billion compared with $716.7 billion witnessed in the prior-year quarter and $750.3 billion in the previous quarter.
Strong Balance Sheet
As of Dec 31, 2017, Legg Mason had $680 million in cash. Total debt was $2.5 billion while shareholders’ equity came in at $3.8 billion.
The ratio of total debt to total capital (total equity plus total debt excluding consolidated investment vehicles) was 39%, an increase from 36% in the prior quarter.
Capital Deployment Update
Legg Mason retired 7.5 million shares at a total cost of $299 million in the reported quarter.
Outlook
Fourth-quarter fiscal 2018
Non-pass through (NPT) performance fees are expected to be about $15-$25 million in fourth quarter fiscal 2018. Also, pass-through performance fees of Clarion, is anticipated to add about $8-$10 million to total GAAP performance fees.
Expenses are expected to increase $4 million on account of higher advertising professional fees and conference activity.
The company expects the comp ratio to increase in the range of 54-56%, reflecting a pick-up in seasonal expenses and lower NPT performance fees.
For the fourth quarter, the company expects an effective tax rate of 31%. For fiscal 2018, Legg Mason will calculate its annual tax rate on the basis of three quarters of the U.S. corporate rate at the old 35% level and one quarter at the new 21% rate. For fiscal 2019, management expects effective tax rate to fall between 22% and 26%. Further, cash tax rate is expected to be 8% in fiscal years 2018 and 2019, then remaining below 10% over the next four to five years.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. There has been one revision higher for the current quarter compared to three lower.
VGM Scores
At this time, LM has an average Growth Score of C, though it is lagging a lot on the momentum front with an F. However, the stock was also allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Our style scores indicate that the stock is more suitable for value investors than growth investors.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Interestingly, LM has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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Why Is Legg Mason (LM) Down 12.8% Since its Last Earnings Report?
A month has gone by since the last earnings report for Legg Mason, Inc. . Shares have lost about 12.8% in the past month, underperforming the market.
Will the recent negative trend continue leading up to its next earnings release, or is LM due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Legg Mason Q3 Earnings Improve, Tax Benefit Recorded
Legg Mason reported third-quarter fiscal 2018 (ended Dec 31) adjusted net income of $1.02 per share, up 59.4% year over year. Results exclude tax benefit of $213.7 million or $2.27 per share, and certain one-time items. The Zacks Consensus Estimate was 84 cents.
Top-line strength and steady AUM were the tailwinds. However, rise in expenses remained a major drag.
Including tax benefit and one-time items, Legg Mason reported net income of $149.2 million or $1.58 per share compared with $51.4 million or 50 cents recorded in the year-ago quarter.
Revenues Rise, Expenses Flare Up
Legg Mason’s total operating revenues in the quarter came in at $793.1 million, up 11% 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 $764.4 million.
Investment advisory fees increased 13.8% year over year to $710 million in the quarter. Further, other revenues climbed 31.2% year over year to $1.64 million. Yet, distribution and service fees were down 9.6% year over year to $81.5 million.
Operating expenses escalated 36% to $820.4 million on a year-over-year basis. The rise was chiefly due to higher compensation and benefits expenses, other expenses and impairment of intangible assets.
Adjusted operating margin of Legg Mason was 27.2%, up from 23.9% recorded in the prior-year quarter.
Solid Assets Position
As of Dec 31, 2017, Legg Mason’s AUM was $767.2 billion, up 8% year over year from $710.4 billion. Of the total AUM, fixed income constituted 55%, equity 27%, liquidity 9% and alternatives represented 9%.
AUM inched up 1.7% sequentially from $754.4 billion as of Sep 30, 2017, driven by upbeat market performance, and other of $13.5 billion, long-term inflows of $2.2 billion and $0.1 billion in acquisitions. These positives were partially offset by liquidity outflows of $2.3 billion, $0.4 billion in negative foreign exchange and realizations of $0.3 billion.
Notably, long-term net inflows of $2.2 billion included equity outflows of $3.2 billion offset by fixed income inflows of $5.4 billion. Additionally, average AUM was $759.9 billion compared with $716.7 billion witnessed in the prior-year quarter and $750.3 billion in the previous quarter.
Strong Balance Sheet
As of Dec 31, 2017, Legg Mason had $680 million in cash. Total debt was $2.5 billion while shareholders’ equity came in at $3.8 billion.
The ratio of total debt to total capital (total equity plus total debt excluding consolidated investment vehicles) was 39%, an increase from 36% in the prior quarter.
Capital Deployment Update
Legg Mason retired 7.5 million shares at a total cost of $299 million in the reported quarter.
Outlook
Fourth-quarter fiscal 2018
Non-pass through (NPT) performance fees are expected to be about $15-$25 million in fourth quarter fiscal 2018. Also, pass-through performance fees of Clarion, is anticipated to add about $8-$10 million to total GAAP performance fees.
Expenses are expected to increase $4 million on account of higher advertising professional fees and conference activity.
The company expects the comp ratio to increase in the range of 54-56%, reflecting a pick-up in seasonal expenses and lower NPT performance fees.
For the fourth quarter, the company expects an effective tax rate of 31%. For fiscal 2018, Legg Mason will calculate its annual tax rate on the basis of three quarters of the U.S. corporate rate at the old 35% level and one quarter at the new 21% rate. For fiscal 2019, management expects effective tax rate to fall between 22% and 26%. Further, cash tax rate is expected to be 8% in fiscal years 2018 and 2019, then remaining below 10% over the next four to five years.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. There has been one revision higher for the current quarter compared to three lower.
Legg Mason, Inc. Price and Consensus
Legg Mason, Inc. Price and Consensus | Legg Mason, Inc. Quote
VGM Scores
At this time, LM has an average Growth Score of C, though it is lagging a lot on the momentum front with an F. However, the stock was also allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Our style scores indicate that the stock is more suitable for value investors than growth investors.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Interestingly, LM has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.