Susquehanna Downgrades Legg Mason, Notes Concerns

In a report published Wednesday, Susquehanna analyst Doug Sipkin downgraded the rating on

from Neutral to Negative, while lowering the price target from $48 to $43, following weakness in performance trends and retail equity flow, as well as lesser tailwinds for the fixed income segment. "The retail equity franchise for LM appears to be weakening. The inflection is driven by an acceleration of outflows at Royce and a slowdown/modest outflow trend at Clearbridge," Sipkin reported, while adding, "Despite its small size, Royce is still the third largest affiliate in terms of operating earnings. We believe May could be the first month of outflows for Clearbridge retail since late 2012/early 2013." Only 24 percent of the Large Cap equity assets outperformed their respective benchmarks in the past 12 months at the end of March. In addition, while the analyst believes that Legg Mason's fixed income business would continue to report inflows, its tailwinds have been slowing. Rising rates have also adversely impacted performance in this division. The EPS estimates for CY2015 and CY2016 have been revised from $2.98 and $3.13 to $3.11 and $3.09, respectively. While the CY2015 estimate has been raised to reflect a tax benefit in the forthcoming quarter, the CY2016 estimate has been lowered to reflect acceleration in retail equity outflows, along with more volatile fixed income markets.