By Natalie Sherman, The Baltimore Sun
8:45 PM EST, January 31, 2014
Legg Mason reported Friday that it earned a profit of $81.7 million in the quarter ended Dec. 31, a turnaround compared to 2012, when it lost $453.9 million during the same period.
That swing was driven largely by the Baltimore-based money management firm's one-time write-off of $734 million of certain assets a year earlier.
Earnings per share were 67 cents, roughly on target with analyst expectations, but shares of the company slipped 95 cents Friday amid a broader market retreat to $42.35 each.
Gabelli & Co. analyst Macrae Sykes said Legg Mason's leaders appeared confident during a Friday call with analysts and strong performance by the company's two largest units should help lead to future growth.
"There's still a lot of skepticism about a sustainable path, but I'm confident that they can achieve it," he said.
Legg Mason struggled to regain its footing after the financial crisis, with clients pulling billions from its funds, but Friday's report indicates it continues to make up lost ground.
For the October-to-December period, Legg Mason showed positive inflows of $9.9 billion and revenue of $720.1 million, up 7 percent from a year earlier.
Assets under management reached $679.5 billion at Dec. 31, up 4 percent from $656 billion on Sept. 30 and 5 percent from $648.9 billion a year earlier.
"We're making good progress," CEO Joseph A. Sullivan said. "It's good for our people here. It's good for Baltimore. We're going to have ups and downs like everybody else, but we expect on a relative basis to keep getting better and better."
Sullivan said the company hopes to see faster growth in the coming months by increasing the types of investment packages available and expanding distribution. Last month, the company hired a new executive, Thomas Hoops, as head of business development. Sullivan said the company is also looking at potential acquisitions.
"We don't think of ourselves as recovering anymore or in turnaround. We've done that," he said. "Now that doesn't mean we're not constantly looking to improve."
In a report issued Friday, BMO Capital Markets analyst David Chiaverini pronounced the company's quarterly performance "mixed."
New types of investments may not be ready fast enough to convince investors to start placing funds with the company in large amounts, he wrote, particularly as factors such as rising interest rates pose threats to the traditional fixed income products that make up Legg's bread-and-butter offerings.
"While management remains focused on addressing its products gaps … it will take time before products can be developed/acquired that will meaningfully add to the flow picture," wrote Chiaverini, adding that the company did better than expected in retaining fixed-income assets in a challenging market.
Legg Mason reported $700 million of inflows to fixed-income funds, compared to $700 million in outflows from equity funds. It had $9.9 billion of inflows to liquidity products.
Neither analysts nor the company mentioned the $21 million federal settlement that its largest investment unit, Western Asset Management, entered into Monday with the Securities and Exchange Commission and the U.S. Department of Labor.
"That's separate in and of itself from what else is going on at Legg Mason," said spokeswoman Mary Athridge, noting that insurance covered the cost and the firm did not admit to the charges. "It was Western's decision to close the matter and move forward."
The company has moved to make shareholders happy. It repurchased and extinguished 2.3 million shares of its stock this quarter, which can increase its value by reducing the supply.
"That's a very good use of free cash flow," Sykes said of the buyback. "We think that's an undervalued strength."
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