Baltimore-based Legg Mason Inc. (LM) experienced a decline in its assets under management (AUM) in September on a sequential basis. This was preceded by a drop in both August and July AUM.

Preliminary month-end AUM came in at $611.8 billion, down 5% from $643.4 billion at the end of August. Moreover, equity AUM, fixed income AUM and liquidity AUM plummeted compared with the prior month.

Legg Mason’s equity AUM in September dipped 10.9% from the prior month to $144.9 billion while fixed income AUM inched down 3.2% to $355.5 billion.

The decrease in equity AUM coupled with drop in fixed income, resulted in long-term AUM of $500.4 billion, down 5.5% compared with the prior month. Concurrently, liquid assets, which are convertible into cash, also edged down 1.9% to $111.4 billion from $113.6 billion at the end of August 2011.

On a quarterly basis, as of June 30, 2011, Legg Mason’s AUM was $662.5 billion, down 2.2% sequentially from $677.6 billion, driven by dispositions and client outflows of $3.7 billion, partly offset by market appreciation. On a year-over-year basis, AUM was up 3.0% from $645.4 billion. Fixed income represented 55% of consolidated AUM as of June 30, 2011, liquidity represented 18% and equity comprised 27%.

During the quarter, fixed income inflows were approximately $0.1 billion, liquidity inflows were $2.0 billion and equity outflows were $5.8 billion. Total client outflows decreased to $3.7 billion from $8.7 billion in the first quarter of fiscal 2012. Besides, average AUM was $670.8 billion, down 0.4% from $673.5 billion in the prior quarter, but inched up 0.4% from $668.3 billion in the year-ago quarter.

Estimate Revision Trends

Legg Mason is expected to release its fiscal second-quarter 2012 earnings on October 24, 2011. Over the last 30 days, 6 out of the 12 analysts covering Legg Mason have lowered their estimates for the second quarter, while two moved in the opposite direction. Furthermore, for fiscal 2012, 8 out of the 14 analysts have lowered their estimates, while one upward revision was witnessed over the last 30 days.

Currently, the Zacks Consensus Estimate for the second quarter is operating earnings of 43 cents per share, a decline of 2.27% from the year-ago quarter. Moreover, the Zacks Consensus Estimate for fiscal 2012 is operating earnings of $1.69 per share, up 7.73% from the prior year.

Furthermore, over the last 30 days, operating earnings estimate for the second quarter and fiscal 2012 have declined by 4 cents and 12 cents per share, respectively.

Peer Performance

Legg Mason’s closest competitors Invesco Ltd. (IVZ) and Franklin Resources Inc. (BEN) reported drop in month-end AUM for the month of September 2011. Invesco’s AUM for the reported month dropped 4.9% to $598.4 billion from $629.4 billion at the end of August 2011, resulting from negative market returns. Moreover, the foreign exchange lowered the AUM by $7.0 billion during the month under review. Franklin’s declared preliminary AUM of $659.9 billion by its subsidiaries, down 7.9% from $716.4 billion as of August 31, 2011, but up 2.3% from $644.9 billion as of September 30, 2010.

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 market demography. Besides, assets outflows remain a significant headwind in the near term. Yet, considering the restructuring initiatives and costcutting measures, we expect operating leverage to improve. Share buybacks will also continue to strengthen investors’ confidence on the stock.

Legg Mason currently retains its Zacks #3 Rank, which translates into a short-term Hold rating. Moreover, considering the fundamentals, we are maintaining a long-term Neutral recommendation on the stock.
 
Zacks Investment Research