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Legg Mason (LM) Reports Loss in Q4; Dividend Raised

Legg Mason Inc. LM reported adjusted loss of 15 cents per share in the fourth quarter of fiscal 2016 (ended Mar 31) as against the adjusted income of $1.03 recorded in the year-ago quarter.  The Zacks Consensus Estimate for the bottom line was pegged at 13 cents per share.

Reduced revenues, higher expenses and decreased assets under management (AUM) were the headwinds. However, steady capital deployment activities were a positive.

Adjusted loss came in at $16.7 million compared with income of $117.9 million in the prior-year quarter. Including one-time items, Legg Mason reported net loss of $45.3 million or 43 cents per share in the fiscal fourth quarter, compared with a net income of $83 million or 73 cents in the prior-year quarter.

Notably, Legg Mason recorded non-recurring items including acquisition and transition-related costs of $49.1 million or 29 cents per share along with a compensation charge associated with the Royce management equity plan (MEP) grant of $21.4 million or 13 cents.

For fiscal 2016, adjusted net income came in at $370.3 million or $3.36 per share compared with $378.8 million or $3.26 per share in the prior fiscal. This lagged the Zacks Consensus Estimate by 46 cents.

Including one-time items, Legg Mason reported net loss of $25 million or 25 cents per share versus net income of $237.1 million or $2.04 per share in the prior fiscal.
 

Performance in Detail

For fiscal 2016, Legg Mason reported total revenue of $2.7 billion, down 3.6% year over year, reflecting a less favorable AUM mix, reduced average AUM and lower performance fees. Revenues were almost in line with the Zacks Consensus Estimate.

Legg Mason’s total operating revenue in the fourth quarter came in at $619.5 million, down 12% year over year. The decline was due to lower investment advisory fees that came on the back of decreased performance fees and lower fees from funds and separate accounts. Also, revenues lagged the Zacks Consensus Estimate of $632 million.

Investment advisory fees decreased 13.6% year over year to $529.9 million in the quarter. However, distribution and service fees were up 2.5% year over year to $89.1 million. Moreover, other revenues declined 70% year over year to $0.53 million.

Adjusted operating expenses increased 2% to $585.6 million on a year-over-year basis. The rise was primarily due to one-time charges incurred during the reported quarter. Moreover, compensation and benefits escalated 6.9% year over year.

Adjusted operating margin of Legg Mason was 5.9%, considerably down from 23.8% in the prior-year quarter.

Assets Position

As of Mar 31, 2016, Legg Mason’s AUM was $669.6 billion, down 5% year over year from $702.7 billion. Of the total AUM, fixed income constituted 56%, equity 27% and liquidity 17%.

Fixed Income and equity outflows were around $8.2 billion and $5 billion, respectively, while Liquidity outflows were around $3.3 billion, in the quarter. Additionally, average AUM was $662.3billion, compared with $707.1 billion in the prior-year quarter.

Balance Sheet

As of Mar 31, 2016, Legg Mason had $1.3 billion in cash, up from $563 million in the prior quarter. Total debt was $1.8 billion, up from $1.1 billion in the preceding quarter. Shareholders’ equity was $4.2 billion, down from $4.3 billion in the previous quarter.

The ratio of total debt to total capital (total equity plus total debt excluding consolidated investment vehicles) was 30%, up from 20% in the prior quarter.

Capital Deployment Activity

Legg Mason repurchased 0.78 million shares in the reported quarter.

Concurrent with its earnings release, the company’s board of directors announced a 10% increase in quarterly common stock dividend to 22 cents per share. The new dividend will be paid on Jul 5, 2016, to shareholders of record as of Jun 13.

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. 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.

However, overall outflows, escalating expenses and lower revenues remain concerns. Legg Mason currently carries a Zacks Rank #3 (Hold).

Competitive Landscape

T. Rowe Price Group, Inc. TROW reported impressive first-quarter 2016 results with reported net income of $1.15 per share outpacing the Zacks Consensus Estimate of $1.02. Moreover, the reported figure increased from the year-ago earnings of $1.13.

Lazard Ltd. LAZ reported a negative surprise of 27.5% in first-quarter 2016 which led to a decline in share price of 2.05%. The company reported adjusted earnings of 50 cents per share, missing the Zacks Consensus Estimate of 69 cents by a wide margin. Also, the reported figure compared unfavorably with 77 cents earned in the prior-year quarter.

Janus Capital Group, Inc. JNS recorded a negative earnings surprise of 9.52% in first-quarter 2016. The company reported earnings per share attributable to common shareholders of 19 cents, missing the Zacks Consensus Estimate by 2 cents. Moreover, results lagged the prior-year quarter’s 23 cents.

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