Legg Mason stock falls

Investors impatient for higher earnings from Citigroup deal propel day's plunge

October 12, 2006|By Tricia Bishop | Tricia Bishop,Sun reporter

Wall Street's skepticism that Legg Mason Inc. can make its landmark business swap with Citigroup Inc. pay off deepened yesterday, with investors driving down the company's stock price about 17 percent for again falling short of earnings expectations.

Legg's stock - which rocketed to nearly $140 earlier this year in the afterglow of the deal - plummeted to $87.15 from $105.31 Tuesday. It was the second-biggest percentage drop on the New York Stock Exchange.

The move signals investors' growing impatience with a mutual fund company that has enjoyed storied success since its beginnings as a stock brokerage more than 40 years ago.

When the deal was announced last year to trade Legg's brokerage business for Citigroup's money-management business, investors hailed the move as the crowning achievement of Chief Executive Raymond A. "Chip" Mason's career. The deal made Legg the world's fifth-largest money manager.

But even as Mason has repeatedly cautioned that it would take time to fully merge the two huge organizations, Wall Street has grown restless at the pace of cost-cutting.

Coupled with that have been concerns about the recent uneven performance and investor withdrawals affecting a number of the combined company's mutual funds, particularly the flagship Legg Mason Value Trust, whose streak of beating the overall market for an unprecedented 15 straight years appears to be in jeopardy.

"There are a lot of skeletons they are working through with the Citigroup integration," Ryan Caldwell, an analyst at Overland Park, Kan.-based Waddell & Reed Financial Inc., told Bloomberg News.

"The costs are higher than they thought, and that combined with outflows is making it exceptionally hard" to forecast earnings.

Lower expectations

Legg said late Tuesday that it now expects earnings per share of between 96 cents and $1.02 - about 14 cents below analyst expectations.

The company blamed the adjustment on a shift in its portfolio to a greater concentration of fixed-income assets, which typically generate lower revenue, as well as on having to pay unanticipated fees in relation to the Citigroup acquisition.

It marked the third consecutive quarter that Legg has missed financial estimates, and each time investors have punished the stock.

Integrating two companies, their staffs and cultures can be challenging. And mergers among financial services giants almost never go as smoothly as planned. The 1998 union of Citicorp and Travelers Group - which formed Citigroup - was complicated by culture clashes and questions of its legality, for example.

"It always complicates things when you're swapping employees and divisions and such," said Elinda F. Kiss, a former Citigroup employee who now is a professor at the University of Maryland's Robert H. Smith School of Business.

Some analysts acknowledged that Wall Street investors want rapid results after mergers.

"Wall Street was wildly bullish; all of a sudden they're wildly bearish. It's been all over the place," said Rachel Barnard, an analyst at mutual fund tracking firm Morningstar Inc., who believes the deal is a good one in the long term.

"Sure they'll go through some hiccups, but they'll come out of the other end of the tunnel [better off]," Barnard said.

Other analysts echoed Barnard's sentiment, but that does little to allay investors' current concerns. Tuesday's announcement that earnings would be down again was, for some, the third strike.

A Legg Mason spokeswoman declined to comment yesterday beyond the company's Tuesday statement. She said Legg would not comment in advance of the company's earnings release on Oct. 24.

A half-dozen investment houses issued research reports scrutinizing the development yesterday, several analysts lowered their target stock prices for Legg and in excess of 16 million shares traded hands - more than 10 times normal.

Merrill Lynch analyst Guy Moszkowski took the news as a sign to get out, changing his ranking on Legg shares from "buy" to "sell."

"We believe Legg will trade at a discount to peers for now based on its earnings disappointments and equity outflows ... and so, we are downgrading," Moszkowski wrote in a report estimating that more money - about $6 billion worth - went out the door in the quarter ending Sept. 30 than came in.

Moszkowski wrote that the trend is likely to continue, "given few strong equity products at Legg right now."

But Jeff Tjornehoj, a research analyst with Lipper Inc., said some of Legg's funds - particularly its high-yield, fixed-income fund and its California, Florida and Arizona municipal debt funds - are doing well compared with peers.

"Among all their funds, we're finding a little bit of everything," Tjornehoj said. "It's awfully hard to hit on all cylinders all the time."

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