Legg Mason Outshines Estimate

May.12.10 | About: Legg Mason (LM)

Legg Mason Inc.’s (NYSE:LM) fourth-quarter earnings of 39 cents per share surpassed the Zacks Consensus Estimate of 35 cents as well as prior-quarter earnings of 28 cents. Earnings came in substantially ahead of a loss of $2.33 per share reported in the fourth quarter of 2009 due to extensive expense control that led to higher-than-expected operating income. This was coupled with augmented growth in Assets Under Management (AUM).

Net income stood at $63.6 million, compared to $44.9 million in the third quarter and a net loss of $330.2 million in the year-ago quarter.

During the reported quarter, total revenue was $671.4 million, up 8.8% year over year due to increase in performance fees, particularly from Permal and Western Asset Management, and higher average AUM. However, on a sequential basis, revenues were down 2.8% due to a decline in fees earned, fee waivers in liquidity products and lower days count.

Revenue from Investment Advisory fees increased 8.3% on year-over-year basis to $573.9 million but declined 2.9% sequentially. Revenue from Distribution and Service fees increased 12.1% year over year to $97.9 million but declined 1.8% sequentially. Other revenues were flat sequentially but decreased 17.6% on year-over-year basis to $1.4 million.

GAAP operating margins grew to 15.8% from 11.5% in the prior quarter and from a negative of 7.3% year-over-year, driven by the impact of pre-tax money market fund support charges of $606.4 million. Growth was also augmented by operating expenses that declined 7.5% sequentially and 14.6% on a year-over-year basis.

As of Mar 31, 2010, Legg Mason’s AUM was $684.5 billion, up 0.4% sequentially from $681.6 billion, driven by market appreciation that was partially offset by reduced client outflows. On a year-over-year basis, AUM was down 8% from $632.4 billion. Fixed income represented 53% of the consolidated AUM as of Mar 31, 2010, liquidity represented 22% and equity comprised 25%.

During the quarter, fixed income outflows were approximately $8 billion, equity outflows were $2.4 billion and liquidity inflows were $0.5 billion. Total client outflows reduced to $10.9 billion against $33 billion in the third quarter of 2010. Besides, average AUM was $681.2 billion, down from $693.3 billion in the prior quarter but up from $657.4 billion in the year-ago quarter.

For full-year of fiscal 2010, net income was $204.4 million or $1.32 per share, compared with a net loss of $2.0 billion or $13.99 per share in fiscal 2009. Total revenue declined 22% year over year to $2.6 billion, primarily driven by lower average AUM. Operating expense decreased 43% year over year to $2.3 billion, while GAAP operating margins rose to 12.2% from an operating loss of 19.9% in the year-ago period. At the end of fiscal 2010, average AUM declined to $675.5 billion compared with $810.4 billion for fiscal 2009. Total client outflows reduced to $82 billion against $158.9 billion in fiscal 2009.

At the end of Mar 31, 2010, Legg Mason had approximately $1.5 billion in cash compared to $1.4 billion at the end of third quarter, while total debt was reduced to $1.4 billion from $2 billion at the end of prior quarter. The ratio of total debt to total capital (total equity plus total debt) also reduced to 20% from 25% at the end of Dec 31, 2009. In January 2010, the company received a tax refund of $459 million and subsequently paid down a $550 million term loan, bringing the ratio of total debt to total capital to 20%.

Share Repurchase Update

Concurrently, the board of Legg Mason approved and authorized a share buyback program worth up to $1 billion of common stock.

Business Developments

During the quarter, Legg Mason raised $218.5 million in the Western Asset Global Corporate Defined Opportunity Fund, one of its largest closed-end fund offering. Additionally, Lipper acknowledged Seven US municipal bond funds and two small cap funds of Legg Mason for its consistently strong risk-adjusted performance relative to their peers.

Restructuring Update

Management of Legg Mason announced its restructuring plan in order to reorganize operations to increase operating leverage. Accordingly, the company plans to lay-off about 350 employees or about 10% of its personnel across departments, starting from July 1, 2010. Alongside, certain shared services are expected to be transitioned to its investment affiliates, while retaining the retail distribution, capital allocation and investment services at the corporate level.

Legg Mason also plans to infuse funds to augment international growth and expand capital available to seed products. The Americas distribution group will share in revenue from retail-based AUM growth.

As a result of these strategic initiatives, Legg Mason projects annual cost savings of approximately $130-$150 million and growth in adjusted operating margins of 6-8%, by the end of fiscal year 2012. However, restructuring costs are estimated to be approximately $190-$210 million, which will be incurred over a period of 18 months.

Dividend Update

On Apr 27, 2010, the board of Legg Mason declared a quarterly cash dividend of 4 cents per share on its common stock. The dividend is payable on July 12, 2010 to shareholders of record as on June 15, 2010.

Legg Mason continues to stagger with the after effects of an acute recessionary environment as most of the company's business continues to face difficult market conditions. Going forward, management believes the conditions will remain moderately challenging in fiscal 2011 as well.

Nevertheless, management has been able to pave a recovery path for fiscal 2010, after posting five consecutive quarters of net losses, given the early signs of economic recovery and improvement in business sentiments. Moreover, a sound cash position against a risk-free balance sheet provides ample leverage even as Legg Mason seeks to return shareholder value and increase investors’ confidence through its restructuring initiatives and share buyback program.