Legg Mason's December AUM Rises - Analyst Blog

Baltimore-based Legg Mason Inc. (LM) experienced a rise in its assets under management (AUM) in December following a fall in November. The company reported preliminary month-end AUM of $672.0 billion for December, up 0.6% from $667.7 billion at the end of the prior month. The decline primarily reflects a fall in fixed income AUM. The company posted around 1.3% decrease in AUM in November.

While Legg Mason's equity AUM in December increased 6.0% from the prior month to $184.2 billion, fixed income AUM declined 1.2% from the prior month to $355.8 billion. The increase in equity AUM primarily resulted in a 1.0% rise in Legg Mason's long-term AUM to $540.0 billion in December from $534.1 billion at the end of the prior month. However, liquid assets, which are convertible into cash, decreased 1.3% to $131.8 billion from $133.6 billion at the end of November 2010.

Legg Mason's second-quarter 2011 (ended September 2010) adjusted earnings of 44 cents per share surpassed the Zacks Consensus Estimate of 36 cents. Results improved based on higher revenues coupled with an increase in total AUM, partially offset by higher operating expenses.

As of September 30, 2010, Legg Mason's AUM was $673.5 billion, up 4% sequentially from $645.4 billion due to a market appreciation of $40.8 billion, partially offset by net outflows of $12.7 billion. On a year-over-year basis, AUM was down 4.2% from $702.7 billion. Fixed income represented 55% of the consolidated AUM as of September 30, 2010, liquidity represented 20% and equity comprised 25%.

However, for the period ended September 2010, the company's closest competitor BlackRock Inc. (BLK) reported a significant rise in AUM to $3.4 trillion, which increased 9% from the prior quarter, primarily due to strong investment performance, favorable foreign exchange movements and robust net new business. AUM also increased 140% year over year, substantially surpassing Legg Mason.

Estimate Revision Trends

Legg Mason is expected to release its third quarter 2011 earnings on January 17, 2011. Over the last 7 days, 5 out of the 15 analysts covering Legg Mason have increased their estimates for the third quarter of 2011, while only two downward revisions were witnessed. Currently, the Zacks Consensus Estimate for third quarter operating earnings is 46 cents per share, an increase of 62.6% from the year-ago quarter.

For the full year 2011, 5 out of the 15 analysts covering the stock have raised their estimates, while there were only one downward revision. The Zacks Consensus Estimate is $1.66 for the full year, up 26.0% from 2010.

Though near-term challenges remain with slow economic recovery, 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. Additionally, with the restructuring initiatives and the cost-cutting measures, we expect operating leverage to improve while share buybacks to boost investors' confidence in the stock.

Legg Mason currently retains its Zacks #3 Rank, which translates to a short-term ‘Hold' rating. Considering the fundamentals, we have a long-term ‘Neutral' stance on the shares.

 
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