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Morningstar | Better Performance and Flows Would Have Improved Legg Mason's 1Q Results; FVE Drops to $40 per Share

We've lowered our fair value estimate for narrow-moat Legg Mason to $40 per share from $44 following the release of somewhat weaker fiscal first-quarter results than we were expecting from the firm.

Legg Mason closed out the June quarter with $744.6 billion in total AUM, up 0.5% year over year but down 1.3% sequentially. Outflows continue to impact the firm's equity AUM, which lost another $2.2 billion to net redemptions during the period, with weaker investment performance (especially from Legg Mason's large-cap equity offerings) expected to keep outflows elevated for some time (contrary to our previous calling for a gradual reduction in quarterly outflows). Despite the rising interest rate environment, the firm continues to pick up fixed-income AUM, generating another $1.3 billion in flows during the first quarter. Inflows have, however, fallen off the $2.6 billion quarterly run rate we'd seen during the eight periods that preceded the June quarter. With alternatives flat from a flow perspective, Legg Mason posted negative $900 million of net long-term outflows during the period.

While average long-term AUM was up 2.8% year over year, first-quarter fee revenue decreased 6.5% on meaningfully lower performance fee income. Total revenue decreased 5.8%, though, as distribution and service fees held steady year over year. With regards to profitability, adjusted operating margins of 16.9% represented a 90 basis-point increase year over year. Our full-year forecast currently calls for margins in a 17%-19% range (down from 19%-20% previously), which we think the firm should be able to match this year (noting that some expense line items have an outsized impact on results during the first quarter of any given year).