Profit leaps 49% at Legg

Results support shift to asset management

`Exactly what we tried to do'

Expanding brokerage says revenue rose 11%

October 24, 2002|By William Patalon III | William Patalon III,SUN STAFF

Legg Mason Inc. reported yesterday a 49 percent jump in its fiscal second-quarter earnings, overcoming a horrid stock market and underscoring that its transformation from regional brokerage house to national asset manager is starting to pay dividends.

"This is exactly what we tried to do," Raymond A. "Chip" Mason, Legg Mason's chairman and chief executive officer, said in an interview. "We've been working on this for years. And I really believe that this is what the financial services company of the future will have to look like."

For its second quarter that ended Sept. 30, net income soared to $45.4 million, a 49 percent increase from the $30.4 million reported for the corresponding quarter last year. Earnings per share were a fully diluted 66 cents, a 47 percent jump from the 45 cents recorded a year ago. Revenue climbed 11 percent to $371.4 million from $335.1 million in the second quarter of last year.

The 66 cents per share was below the 68-cent mean estimate of six analysts, according to Nelson Information/Thomson Financial. However, the mean was pulled up by one estimate that was much higher than the others.

Legg's shares rose yesterday, climbing $1.58, or 4 percent, to close at $46.51. By contrast, the Dow Jones industrial average yesterday rose 0.52 percent.

The firm also declared a regular quarterly dividend of 11 cents per share on its common stock yesterday, payable Jan. 6 to shareholders of record at the close of business Dec. 11.

Over the past few years, Legg, once viewed as a high-quality regional brokerage house, has branched out by acquiring asset-management firms. That's helped, according to the company: While brokerage fees from stock and bond trades made by retail customers can be very cyclical, fee-based asset management tends to be much more stable, because clients tend to have a longer-term view and thus keep their accounts with their investment managers.

Legg also made sure to assemble a diverse portfolio of companies by purchasing firms in both the stock and bond arenas, company officials said. That way - because stocks and bonds tend to move opposite one another - when one asset class is doing poorly, the other will do well.

That's just what happened during the second quarter, which saw the Dow plunge 12 percent in September alone, Legg Mason officials and analysts said. With bonds performing well, and with Legg continuing to collect fees from the $176.6 billion in assets it has under management, the firm enjoyed a strong quarter in the face of a terrible market for stocks. Assets under management were up 12 percent from the second quarter last year, but because of the stock market were down slightly from the $177.7 billion for the quarter that ended in June.

Investment-advisory and related fees for the second quarter totaled $203.1 million, up 12 percent from the year-ago quarter. They accounted for 55 percent of Legg's net revenue. Commission fees of $79.1 million - 21 percent of the firm's revenues - were unchanged.

"It was a really solid quarter," said Bjorn Turnquist, an analyst who follows Legg for SNL Securities in Charlottesville, Va. Legg Mason "has all the pieces ... and of all the asset-management companies, it's probably the strongest out there."

According to Mason, the best gauge of the company's health may be its performance during the 12 months that ended Sept. 30. Legg's net revenue of $1.534 billion, net earnings of $181.6 million and earnings per share of $2.64 for that period represented record results for any 12-month stretch in the history of the 103-year-old investment firm, according to Mason.

The positive outlook for Legg Mason isn't unanimous. Merrill Lynch & Co. analysts Judah Kraushaar and William R. Katz maintained their "sell" rating on Legg Mason, contending that the second-quarter profit was less than they expected and that the stock was made overly pricey by the recent run-up.

Mason said he spoke with Katz about the "sell" rating, and humorously debated the analysts' view of both the company and the stock market.

As devout bargain-hunters, Legg Mason's money managers tend to wade into the market during the most dreary stretches. Believing the stock market may well be near its bottom, Mason chuckled when he recalled how he asked Katz: "Why would you do this now?" before adding, "It actually seems like this is a buying time, not a selling time."

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