Legg Mason (LM) Q3 Earnings Improve, Tax Benefit Recorded

Legg Mason Inc. (NYSE:LM) reported third-quarter fiscal 2018 (ended Dec 31) reported 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 assets under management (AUM) were the tailwinds. However, rise in expenses remain 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.

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 #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Competitive Landscape

BlackRock, Inc. (NYSE:BLK) posted fourth-quarter and full-year 2017 results. Adjusted earnings for the quarter came in at $6.24 per share, which outpaced the Zacks Consensus Estimate of $6.08. Also, the bottom line came in 21% 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.

Among others, Franklin Resources, Inc. (NYSE:BEN) and T. Rowe Price Group, Inc. (NASDAQ:TROW) will report December quarter-end results on Jan 30.

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