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Morningstar | Weaker Equity Performance and Outflows Affect Legg Mason's Fiscal 3Q; No Change to FVE

There was little in no-moat-rated Legg Mason's fiscal third-quarter results that would alter our long-term view of the firm. We are leaving our $30 per share fair value estimate in place. Legg Mason closed out the December quarter with $727.2 billion in assets under management, down 3.7% sequentially and 5.2% year over year. Outflows continue to affect the firm's equity AUM, which lost another $3.3 billion ($6.7 billion) to outflows during the fourth quarter (first nine months of the year), with weaker investment performance--especially from Legg Mason's large-cap equity offerings--expected to keep outflows elevated for some time. The firm's record of bucking the rising interest-rate environment with continued inflows from its fixed-income operations, which came to an end during the September quarter (with its bond funds losing $500 million to net redemptions), actually accelerated in the December quarter, with its bond funds losing $5.1 billion to net redemptions. At this point, organic growth looks likely to come in at negative 1%-2% for fiscal 2019, with the firm likely to close out the year with $715 billion-$735 billion in AUM.

While average long-term AUM was down just 5.2% year over year, Legg Mason reported an 11.2% decline in its fiscal third-quarter revenue, driven by an 8.7% reduction in its realization rate (to 0.341% from 0.374%), as well as meaningfully lower performance fee income year over year. This left the company's top line down 6.1% during the first nine months of fiscal 2019, in line with our full-year forecast calling for a mid-single-digit decline in revenue. With regards to profitability, year-to-date adjusted operating margins (by our calculations) of 17.7% represented a 180-basis-point decrease in margins year over year. Our full-year forecast continues to call for operating margins of 16%-18%, which we think the firm should be able to match this year, given results through the first three quarters of fiscal 2019.