Mason asks Street's patience

Earnings fall short of analysts' estimates for 3rd straight quarter

October 25, 2006|By Laura Smitherman | Laura Smitherman,Sun reporter

Legg Mason Inc. Chairman Raymond A. "Chip" Mason chastised Wall Street yesterday for overly rosy forecasts and assured investors that the acquisition of Citigroup Inc.'s investment unit is on track.

Mason made his comments as the company reported that its quarterly profit missed analyst estimates, as expected. Mason had won praise for engineering the business swap with Citigroup last year, and many of those same Wall Street analysts cheered the deal that helped push Legg Mason's stock price to new heights.

The Baltimore money management company said net income in the fiscal second quarter rose 19 percent to $144 million, or $1 a share, compared with $121 million, or 99 cents a share, in the quarter last year. The latest results, the slowest earnings growth in more than three years, were 2 cents short of the consensus estimate of analysts surveyed by Thomson Financial.

As the company endeavors to integrate operations from Citigroup that made it the world's fifth-largest money manager, Mason has wrestled with Wall Street's expectations.

The company traditionally has declined to give analysts guidance, and Mason has been critical of the market's focus on short-term earnings and whether companies hit or miss analyst numbers.

But in an unprecedented move this month, Legg Mason warned that it would fall short of estimates and estimated it would earn 96 cents to $1.02 a share. At the time, the consensus of estimates from analysts was $1.16.

"You are estimating earnings per share too aggressively," Mason told analysts in a conference call yesterday.

"We sit here very pleased with what we've accomplished, and I think you all feel as though we haven't accomplished enough. I can tell you we have worked on this hard and it is going very well."

The past quarter marks the third in a row that the company has missed the consensus number. That sparked sell-offs, sending the share price plummeting more than 35 percent from a high of nearly $140 this year.

The stock slipped 14 cents, or less than 1 percent, yesterday in trading on the New York Stock Exchange to close at $86.50.

"The stock got way ahead of itself when the deal was announced because there was this euphoria about what the earnings power of this combined company could be," said Eric L. Veiel, an analyst at T. Rowe Price. "The reason the stock is not really going up now is that it's sort of where we thought it would be."

Legg Mason noted that the aggregate assets it manages on behalf of clients reached a record of $891 billion in the fiscal second quarter, an increase of $36.7 billion during the quarter, including $20.3 billion in market appreciation and $16.4 billion in new investor money.

Clients piled back into market accounts acquired from Citigroup after months of withdrawals that had raised concerns among investors. But the company saw $5 billion in outflows from equity assets in the second quarter as some key money managers have stumbled.

The company doesn't break out the assets managed by each subsidiary, which operate almost autonomously through revenue-sharing agreements.

But Michael Hecht, an analyst at Bank of America, wrote in a research note that he suspects the "main culprits" for outflows are several Smith Barney and Salomon Brothers funds acquired from Citigroup, which are being rebranded as Legg Mason Partners Funds, Private Capital Management and Legg Mason Capital Management.

One of LMCM's funds is Bill Miller's Value Trust, which is in danger of breaking his unparalleled record of beating the S&P 500 stock index for 15 consecutive years. He is about even for the year, compared with a 10 percent gain in the S&P.

Mason said retail clients have left Miller's funds but that new money from institutional clients has offset those outflows.

Miller's problem, Mason said, is that "people must believe he was struck with the dumb stick and that he no longer knows how to run money." He added that he thinks that notion is "ridiculous."

Elsewhere in the Legg Mason empire, Bruce Sherman at Private Capital, in Naples, Fla, which manages money for wealthy families and other investors, has run into trouble. According to the firm's Web site, its returns were down 0.2 percent for the year through June. Mason acknowledged that the firm has gone through a "rough period" but that returns have since rebounded.

"These managers will work through this," Mason said.

Some Legg Mason subsidiaries have grown, particularly Permal Group, which manages funds of hedge funds, and the fixed-income firm Western Asset Management.

Legg officials said Permal has grown from about $20 billion to $26 billion since being acquired last year, and Western has more than $11 billion in the pipeline this month, on track to eclipse its best monthly take ever of $12 billion.

The company also noted that its employee base has increased to 3,900, about 100 over last year despite layoffs of about 370 people. Permal, Western and LMCM are among those subsidiaries that have hired.

As for cost savings from more efficient systems and eliminated operations, the company said it has achieved $55 million over the past two quarters and expects to cut a total of $120 million through March of next year.

The integration of Citigroup assets is expected to be mostly done by late December, Mason said, with some "spillover" early next year.

"Our goal has been to retain as many of the acquired assets as possible, and I think we have done a great job," he said.

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