Legg gains, stock tumbles

31% rise in earnings disappoints Wall Street

93 cents a share, but $1 was expected

Asset management side did `very good,' chief says

July 27, 2005|By Laura Smitherman | Laura Smitherman,SUN STAFF

Legg Mason Inc., which is poised to become the fifth-largest money manager in the world, saw its stock tumble from historic highs after its earnings report yesterday fell short of Wall Street expectations.

Stock in the Baltimore-based investment firm fell nearly 8 percent, or $8.72, to close at $103.30 on the New York Stock Exchange. That made it the second-worst performer yesterday among financial companies in the Russell 3000 Index.

Legg Mason investors had enjoyed a rapid rise in the stock price after the firm announced last month that it would swap its brokerage and investment banking operations for Citigroup Inc.'s money management business.

When the $3.7 billion deal is done, Legg Mason will double the assets it invests for clients to more than $800 billion.

The stock had climbed more than 35 percent in the weeks following the announcement to reach an all-time high of $118 Thursday.

Then on Monday, Banc of America Securities analyst Michael Hecht downgraded his rating on the stock to a "sell." And yesterday, Legg Mason reported it earned $113 million, or 93 cents per share, during the three-month period that ended in June. Analysts surveyed by Thomson Financial had predicted the firm would make $1 a share.

Raymond A. "Chip" Mason, the firm's chairman and chief executive officer as well as its largest individual stockholder with more than 3 million shares, said yesterday that even he thought investors might have been too exuberant in bidding up the stock.

`Ahead of itself'

"I thought the market might have been a little ahead of itself," Mason said in an interview. "I'm not surprised somebody came out and said the stock has already gone farther than we think it should go."

Still, Mason said, investors might have misinterpreted the earnings report. The firm's profit increased 31 percent from $86.4 million, or 76 cents a share, in the corresponding quarter a year ago. And when the brokerage and investment banking units are taken out, the firm did even better with $89.1 million in net income, or a 40 percent year-over-year increase.

"They should be concerned with how Legg Mason's asset management business is doing because that's the company they're going to own going forward," Mason said, "and those numbers were really very good."

Legg Mason's assets under management grew to a record $398 billion at the end of June after the firm attracted more than $16 billion in new investor money during the quarter. While Legg Mason continued to outpace many of its peers, the flow of money into mutual funds and accounts managed for wealthy investors was "a little sluggish," Mason said, as stock markets haven't moved much and investors put more money in real estate and hedge funds.

"Where we really got clobbered was investment banking," said F. Barry Bilson, the firm's senior vice president of finance.

The investment banking division, called capital markets, saw its revenue decline by 7 percent from the prior-year quarter to $63.2 million. Revenue from the brokerage business, in contrast, was up 8 percent to $187 million.

Ryan Caldwell, an analyst for Waddell & Reed Financial Inc., which owns 2.5 million Legg Mason shares, said rumors about the Legg Mason-Citigroup deal, which circulated for weeks before the deal was formally announced, disrupted the investment banking business.

May sell division

"With the uncertainty around capital markets, that probably just slowed business down," Caldwell said.

Citigroup has said it is considering selling the investment banking division. Mason said in a recent interview that employees might attempt a buyout, though he said that's "probably the last option."

Once the Legg Mason-Citigroup deal is closed - a target date has been set for the end of October - Legg Mason will be solely focused on managing money.

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