Legg beats analysts' call

Adjusted net income for 3Q jumps 57% to a record

January 26, 2007|By Paul Adams | Paul Adams,Sun reporter

If Legg Mason Inc. Chairman Raymond A. "Chip" Mason was looking for vindication for his acquisition of Citigroup Inc.'s investment unit, he came close to getting ityesterday.

The Baltimore-based money manager reported fiscal third-quarter earnings that beat analyst estimates for the first time since the $3.7 billion deal closed in December 2005.

The news ended a months-long slide in the company's share price that began last year after earnings fell short of expectations, raising concerns about whether the acquisition was panning out as hoped and if Mason could deliver its promised benefits.

Legg said profit for the quarter that ended Dec. 31 fell to $174.6 million, or $1.21 per share, compared with $760.3 million, or $5.80 per share, in the year-earlier quarter. But net income climbed 57 percent - to a record - excluding the one-time $643 million gain from the Citigroup deal, which was included in the third quarter of 2005, the company said.

The average estimate of 12 analysts polled by Thomson Financial was for earnings of $1.13 per share.

Legg's shares surged more than 5 percent in early trading on the New York Stock Exchange yesterday before settling back to close at $105.44 per share, up $1.81, or nearly 2 percent.

"This gets the monkey off their back," said Jeffrey Ptak, an analyst at Chicago-based Morningstar Inc. who doesn't own Legg shares. "Obviously, it's been a rough few quarters, and now they've been able to sort of quell the unrest on Wall Street."

Mason's legacy may be tied up in the Citigroup deal, which was by far his largest purchase and came shortly before he set a course to retire by the end of this year. In an interview yesterday, he said the acquisition is starting to bear fruit after a massive integration effort that temporarily sent costs soaring.

"What I said in the beginning was that it would take us a year to 18 months, and I still think it's going to take that long," he said.

Revenue reached a record $1.13 billion in the quarter, an increase of 64 percent from the year-earlier quarter.

The company's results were helped by a surging market and a mixture of higher fee income from its bond and hedge fund business. Clients added $23 billion to Legg funds, an increase of 63 percent for the quarter despite continued net outflows on the equity side of the business.

Legg's equity funds were hurt by the weak performance of some of the firm's star money managers - most notably Bill Miller, whose Value Trust fund last year broke its 15-year streak of beating the Standard & Poor's 500 index. Mason said many of those lagging funds have rebounded in recent months as the market has surged.

"I kept saying, `we need some wind at our backs rather than in our face' ... and I think in this quarter that probably happened," he said.

Assets under management climbed 11 percent from a year ago to a record $944.5 billion. More than half of the jump - or $53.4 billion - occurred in the third quarter, with market gains accounting for $30.9 billion of the increase.

Bond funds grew by 15 percent to $460 billion, and money-market assets gained 3.4 percent to $147.7 billion. Clients continued to pull some money out of Legg's equity funds, but those outflows were offset by market gains, resulting in a net increase of 9.3 percent to $337.1 billion.

Mason said it's normal for equity fund managers to experience down cycles in a tough market. The exception has been Miller and his Value Trust, which for years spoiled the company with consistent, market-beating results. It was only a matter of time before Miller's streak ended, Mason said, but the timing was terrible, given the spotlight on the company's results following the Citigroup deal.

"Performance is so critically important and if you're performing well, you tend to draw assets, and if you're not performing well, you tend not to draw assets," Mason said.

Analysts said reversing the trend on the equity side will be critical to the success of the Citigroup transaction.

"When the deal was consummated and put together, the concept was that the equity side would see faster flows," said Ryan Caldwell, an analyst for Overland Park, Kan.-based Waddell & Reed Financial Inc., which owns 1.1 million Legg shares.

Organic growth in other parts of the business are a positive sign, he said.

"It provides at least a roadmap to stability," Caldwell said of the quarterly results.

Mason, who has chastised Wall Street in the past year for setting overly optimistic earnings forecasts, cautioned analysts again yesterday to be "prudent in running ahead of the facts." He said there is still room for surprises in the results, though he said the next few quarters will probably be in line with recent earnings results.

"Some investors were expecting Legg to just race out after the deal," said Ptak, the Morningstar analyst. "Maybe this is an opportunity to get a fresh perspective."


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