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Analysts cautiously optimistic on Legg despite loss

Despite posting its first quarterly loss since early 2009, analysts are cautiously optimistic about the future of Baltimore-based asset manager Legg Mason Inc., citing the firm’s buy back of shares and movement toward positive flows.

“What we like is that they’ve continued to shrink their market cap by repurchasing shares,” said Macrae Sykes, a financial analyst with Gabelli & Co. Inc. in Rye, N.Y.

The company this quarter repurchased 6.2 million shares for $155 million, completing a 34.4 million share, $1 billion repurchasing of stock over the last two years. In May, Legg Mason’s board of directors authorized another $1 billion of share repurchasing to take place over the next three fiscal years.

Legg Mason reported Friday a loss of $9.5 million, or 7 cents per share, in its fiscal first quarter, which ended June 30, compared to a profit of $60 million, or 40 cents per share, in the corresponding period last year.

Analysts polled by Thomson Reuters were expecting the money manager to break even.

The quarter’s loss was largely driven by a debt restructuring deal that cost $69 million, or 32 cents per share. Legg Mason announced in May it would buy back $1.25 billion in convertible senior notes from a fund managed by Kohlberg Kravis Roberts & Co. L.P.

That, along with the issuance of $650 million in debt and a new bank loan, reduced the firm’s debt by $350 million.

The company also had an expense of $23 million, or 11 cents per share, from the launch of two funds.

Legg Mason raised $800 million for the ClearBridge Energy MLP Total Return Fund and more than $200 million for Western Asset Mortgage Capital Corp., a real estate investment trust.

“What’s important is that they were basically able to raise a billion dollars worth of assets during the quarter,” Sykes said.

Legg posted $630.7 million in revenue for the quarter, a 12 percent decrease from $717.1 million in the first quarter of 2011 and 2 percent short of the $645.2 million in revenue analysts polled by Thomson Reuters were expecting.

“The flow situation has still been negative, but it got better in the quarter, but the margins are still under pressure,” said J. Jeffrey Hopson, an analyst with Stifel Nicolaus in St. Louis.

Assets under management were $631.8 billion at the end of the quarter, a decrease of $11.5 billion from March and $30.7 billion from a year ago.

Client flows for the first quarter decreased by $2.6 billion. Stock assets shrank by $3.9 billion, but money funds grew by $1.2 billion and bond funds by $100 million. Legg Mason posted a $4.9 billion decrease in net client flows last quarter and a $3.7 billion decrease a year ago.

Stock assets, which tend to have higher fees, have decreased by 17 percent over the last year. Bond funds decreased about 1 percent during the same period.

“This was the best quarter for long-term outflows in nearly five years,” Chairman and CEO Mark Fetting said in a conference call with analysts.

Market depreciation put a $4.3 billion dent in assets, which compares to $24.4 billion in appreciation in the previous quarter and $8 billion in appreciation a year ago. Legg Mason also transferred $4.6 million in liquidity to Morgan Stanley Smith Barney.

“Legg Mason made significant progress positioning the firm for long term growth, even amid valuation retrenchment across global investment markets, which led to a drop in our quarterly revenues,” Fetting said.

The company also declared a quarterly cash dividend on its common stock of 11 cents per share, up from 8 cents paid a year ago.

“We continue to recommend the shares. We believe that it’s a compelling valuation here and they’re slowly turning around flows and performance, buying back shares, and we think that should lead to a higher stock price,” Sykes said.

Legg Mason’s shares lost 27 cents, or 1.1 percent, to close Friday at $24.86. The shares have traded as high as $29.99 in the last year.