Shares of Legg Mason Inc. spiraled down nearly 9 percent yesterday after the Baltimore money manager missed Wall Street expectations and snapped a streak of four consecutive quarters of record earnings growth.
Legg's stock was hammered despite a 48 percent increase in its fiscal first-quarter profit - the second best quarter in the company's history - and record assets under management and revenue gains in its investment advisory business
Legg made $86.4 million on revenue of $538.9 million in the three months that ended June 30, up from $58.4 million on revenue of $417.3 million a year earlier. But the per share earnings of $1.14 missed the consensus estimate of analysts by 9 cents, sending Legg's shares plummeting $7.25 a share to $75.55 a share, down 24 percent from their 52-week high. Nearly 3.9 million shares changed hands, more than 10 times the company's average daily volume.
The drop stunned company executives.
"I am shocked," said Raymond A. "Chip' Mason, Legg Mason's chairman and chief executive. "It doesn't make any sense. It was a great quarter. I just think there may have been a seller looking for a bounce on the upside because of the quarter. I don't really know."
Analysts tracked by Nelson Information/Thomson Financial had expected the Baltimore money management and brokerage firm to earn $1.23 a share.
"It was disappointing in a sense that they missed their earnings estimates," said Robert Lee, a research analyst at Keefe Bruyette & Woods Inc. in New York. "I didn't walk away saying there is a cause for concern. It was probably ... a reflection they were doing so well for so long that maybe expectations got ahead of themselves."
Analysts in a conference call with Legg executives focused on a nearly 16 percent decline in the company's investment banking revenue to $26.5 million.
The weak stock market dampened the number of initial public offerings of closed-end bond funds and real estate investment trusts issues by companies that Legg's investment bankers bring to market.
"We just had a quarter where because the market was so weak you couldn't do deals which were scheduled to come," Mason said.
Mason, however, said in the teleconference with analysts that the backlog of deals is strong.
"If the market would stabilize, I think you will see investment banking for most firms, including ours, will pick up. The backlog is certainly there," he said.
The company also said revenue from retail and institutional securities brokerage, which includes brokerage commissions, rose just 1 percent to $128.3 million from a year earlier.
Revenue from Legg's investment advisory business was up 53 percent in the quarter to $368.8 million. Investment advisory and related fees represented 68 percent of the company's net revenue in the quarter, up from 58 percent in the quarter a year earlier.
Legg's assets under management reached a record $295.7 billion in the quarter, up 37 percent, from $216.6 billion a year earlier, and up 3 percent from the start of the quarter. Total client assets, which include those held in brokerage accounts, rose 31.4 percent to $365.8 billion.
"We feel that we have a very strong [mutual fund] product and we will continue to look for ways to increase those flows," Mason told analysts yesterday. "Our flows have been substantially better on a relative basis than the industry over this period."