Morningstar | Weaker Equity Performance and Outflows Limit Legg Mason's Recovery; Lowering FVE to $36 per Share. See Updated Analyst Note from 25 Oct 2018
We've lowered our fair value estimate for no moat-rated Legg Mason to $36 per share from $40 following the release of somewhat weaker fiscal first-half results from the firm. Legg Mason closed out the September quarter with $755.4 billion in total AUM, up 0.1% year over year and 1.5% when compared with the June quarter. Outflows continue to impact the firm's equity AUM, which lost another $1.1 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. The firm's track record of bucking the rising interest rate environment with continued inflows from its fixed-income operations came to an end during the September quarter, with its bond funds losing $500 million to net redemptions during the period. While Legg Mason's alternatives platform did pick up $600 million in inflows during the company's fiscal second quarter, the firm still posted $1 billion of net long-term outflows during the period.While average long-term AUM was basically flat year over year, Legg Mason saw a reduction in its realization rate (to 0.361% from 0.366%), as well as meaningfully lower performance fee income, leaving fiscal second-quarter investment management fee revenue down 1.4% year over year. Higher levels of revenue from other sources left total revenue down 1.3% for the quarter, though, which left top-line growth during the first half of fiscal 2019 down 3.6% when compared with the same period a year ago. With regards to profitability, adjusted operating margins of 17.4% during the first half of fiscal 2019 represented a 110 basis-point decrease year over year. Our full-year forecast continues to call for operating margins in a 17%-19% range, which we think the firm should be able to match this year, given results through the first two quarters of fiscal 2019, albeit at the lower end of our forecast range.
Legg Mason is a holding company. Through its subsidiaries, the company is an asset management company that provides investment management and related products and services. The company's investment advisory services include discretionary and non-discretionary management of separate investment accounts for institutional and individual investors. The company's investment products include proprietary mutual funds ranging from money market and other liquidity products to fixed income, equity and alternative funds managed in various investment styles. The company also provides other domestic and offshore funds to both retail and institutional investors, privately placed real estate funds, hedge funds, and funds-of-hedge funds.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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