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Legg Mason Stable For Now, But Precocious Tailwinds Down The Line

BMO Capital Markets analysts David J. Chiaverini and Richard Fellinger maintain an Underperform rating for Legg Mason Inc (NYSE:LM) as the company announce in-line FY3Q14 results but headwinds remain in long-term flows.

Legg Mason Stable For Now, But Precocious Tailwinds Down The Line

Legg Mason Inc (NYSE:LM) reported FY3Q14 GAAP EPS of $0.67. Financial results were in line with its preannounced range of $0.65 to $0.68 given on January 13.

Legg Mason’s earnings impact and analysis

Overall we view the quarter as mixed as long-term flows continue to be much improved over recent years but were still only flat in the quarter and negative for the calendar year (-$6.5B). As opposed to peer and industry trends, the company had fixed income inflows (+$700mm), offsetting equity outflows (-$700mm) in the December quarter. Our stance has been that Legg Mason Inc (NYSE:LM) is not as well positioned as peers to capture flows in an equity rotation scenario or rising interest rate environment. While lagging equity flows supports that stance, the company has done a better-than-expected job retaining fixed income assets as inflows into its non-traditional fixed income offerings have offset outflows from broad market strategies and municipal products.

We maintain our Underperform rating for Legg Mason Inc (NYSE:LM) as we continue to expect AUM growth will be at the low end of our peer group, owing to the gaps in its current offering (alternatives, multi-asset and global equities) holdingback flows and an AUM mix that remains heavily weighted to fixed income and liquidity strategies (73%). While management remains focused on addressing its products gaps, including the recent hire of Thomas Hoops as head of business development, we believe it will take time before products can be developed/acquired that will meaningfully add to the flow picture.

Legg Mason valuation and recommendation

Our FY2014/2015 GAAP EPS estimates for Legg Mason Inc (NYSE:LM) are unchanged at $2.36/$2.75. Our new $41 price target is based on a sum-of-the-parts valuation (see page 2). We maintain our Underperform rating.

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