Legg's 24% rise in profit falls short of expectations

October 25, 2007|By Allison Connolly | Allison Connolly,SUN REPORTER

Clients continued to pull their money out of stock funds last summer because of turmoil in the equity markets over the mortgage crisis, leaving Legg Mason Inc. with fiscal second-quarter earnings that rose 24 percent but disappointed Wall Street.

Baltimore's Legg Mason also reported yesterday that three of the investment firm's largest equity managers have struggled with client withdrawals "caused primarily by recent underperformance."

That includes Legg Mason Capital Management run by renowned stock picker Bill Miller, whose Value Trust fund in 2006 ended its 15-year string of besting the Standard & Poor's 500 stock index.

The two other managers were Private Capital Management run by Bruce S. Sherman and ClearBridge Advisors, which was acquired from Citigroup Inc.

Legg's equity funds have trailed two-thirds of their peers this year, according to research firm Morningstar Inc. in Chicago.

Yet Chairman and Chief Executive Officer Raymond A. "Chip" Mason is looking ahead with optimism.

He said the search for a new chief executive and an international equity acquisition continues. Total assets have surpassed the $1 trillion mark, albeit largely due to Legg Mason's 2005 acquisition of Citigroup's money management business.

And while second-quarter earnings fell short of analysts' expectations, it was still the second- strongest quarter in Legg Mason's 108-year history.

"We believe our business model is as good as you can get and we believe that we have some of the finest managers in the country," Mason said analysts in conference calls.

Net income for the second quarter that ended Sept. 30 climbed to $177.5 million, or $1.23 per diluted share, from $143.7 million, or $1 per diluted share, for the quarter last year.

Analysts expected earnings of $1.29 cents per share, according to a poll by Thomson Financial.

Revenue rose 14 percent to $1.17 billion, from $1.03 billion for the second quarter of 2006. Assets grew to a record $1.01 trillion, up 13 percent, from $891.4 billion.

Shares of Legg Mason fell $2.93, or 3.5 percent, to close at $80.52.

Net client cash flows during the quarter amounted to $300 million, which Mason called "disappointing." Clients withdrew $9.6 billion from equity funds. Yet net client cash flows in fixed income were strong at $11 billion.

Analyst Matt Snowling, with Friedman, Billings, Ramsey & Co. Inc., wrote in a note that he sees few catalysts that would send the stock higher:

"With equity outflows continuing and uncertain credit markets possibly threatening fixed-income performance, we do not believe a quick turnaround is likely for Legg in the near term."

Equity analyst Andrew Richards of Morningstar Inc. said he wasn't expecting "outstanding" results given the turmoil in the equity markets. But he still considered the company's performance during the quarter was strong and said the stock didn't deserve yesterday's beating.

At the end of September, 55 percent of Legg Mason's funds have the top two ratings from Morningstar, compared with 39 percent in June 2006, Mason said.

F. Barry Bilson, Legg Mason's vice president of finance, said the firm still has confidence in its equity managers, and that they have proven themselves over the long term despite their recent struggles.

"It isn't everything you hope for but it certainly is respectable," he said of the performance during the second quarter.

Legg Mason's board said yesterday that it enlisted a professional search firm to help find a new CEO but declined to name the firm.

Mason, 71, agreed to stay on for two years after the Citigroup acquisition. His appointed successor, James W. Hirschmann, bowed out in April, saying he wanted to remain in California with his family as head of Western Asset Management, Legg Mason's largest subsidiary.

Mason told analysts that there is no deadline for finding someone, though his two-year extension is running out.

As for an acquisition, Mason said the company is looking for one that costs at least $1 billion, big enough to "move the needle."

allison.connolly@baltsun.com

Bloomberg News contributed to this article

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