T. Rowe Price Group, Inc. (TROW), Franklin Resources, Inc. (BEN), Eaton Vance Corp (EV) – Asset Managers: A Market Proxy and More

A potential turnaround play

Legg Mason Inc (NYSE:LM) could be an interesting turnaround situation. Once an industry darling, it is currently struggling. The company reported adjusted income for the fourth quarter of $67 million, a 27% drop from the previous quarter and down 48% from the comparable fiscal 2012 period. Operating revenues were $668 million, down 1% from the prior quarter but up 3% from fiscal 2012.

Legg Mason Inc (NYSE:LM)’s AUM was $664.6 billion, up 2% from December 31, 2012 and up 3% from March 31, 2012. The quarterly increase was mainly due to $12.1 billion of market performance and $5.4 billion from an acquisition. These items were offset by a disappointing $1.8 billion in net fund outflows.

The company isn’t very efficient. It operates primarily through 12 asset managers, each generally run as a separate business. This setup seems to generate much less revenue, about $.40 of annualized revenue for every $100 of AUM, than its peers. Comparatively, T. Rowe Price Group, Inc. (NASDAQ:TROW) gets around $.50 per $100 of AUM, $.60 for Eaton Vance Corp (NYSE:EV), and $1.00 per $100 for Franklin Resources, Inc. (NYSE:BEN). The combination of lagging revenue generation and associated higher than average compensation/distribution costs show up in Legg Mason Inc (NYSE:LM)’s relatively weak 9% cash earnings profit margin.

But the company is trying to improve its performance. The firm changed their CEO, reorganized the executive management team, and adopted a new capital management plan to restructure and reduce debt and return capital to shareholders over the last year. A major reason for these changes has been activist shareholder Nelson Peltz. Peltz and his Trian Fund, with a 10% stake and a seat on the board, has been a positive agent for change in many companies and hopes to get this one turned around. If he can, there might be a substantial amount of value to be realized in the shares.

Conclusion

Asset management companies are an interesting way to play an expectant bull market. They are highly profitable and offer significant leverage with relatively low long-term business risk. Investigating these firms when times are tough might pay big rewards when markets eventually improve.

The article Asset Managers: A Market Proxy and More originally appeared on Fool.com and is written by Bob Chandler.

Bob Chandler has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Bob is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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