Tuesday, October 17

Legg Mason: unloved, for now?



Who is Legg Mason?

Legg Mason (ticker: LM) is a global asset management company, providing investment management services through mutual funds, insitutional management and wealth management.
Last year, LM did a transformational deal where they acquired Citicorp's asset management service, as well as Permal, one of the largest fund-of-hedge-fund providers in the world.

The company is also well-known for their flagship fund, the US$19 billion Legg Mason Value Trust, managed by the superstar fund manager Bill Miller. The fund has beaten the S&P 500 index for 15 consecutive years.

What's the story?

LM has missed its earnings guidance for 3 consecutive quarters and the stock has dropped 30% for the last 6 months. Some blame the Citigroup transaction and the fact that Bill Miller's fund has been trailing the S&P index by 10% so far.

Why I think is an opportunity

  • I generally like FIG (financial institutions) because it has a fabulous business model of "using people's money to make money". Secondly, everyone needs some sort of financial services in times good and bad. Last but not least - if you know how an average finance professionals are paid vs highly-regarded experts in other industries, you would know how profitable the business must be.
  • With the proliferation of mutual funds in the US, the asset management industry has been experienced rapid growth for many years. People have been betting a similar growth pattern in Europe (already happening) and in Asia (not yet, but big potential). With the acquisition of Citibank asset management, it shows that LM is serious about sticking to its core business and expanding beyond US.
  • In terms of valuation, the stock looks relatively cheap with 1.9x price/book ratio (this is the ratio most commonly used for FIG. Current industry average: >2.5x). With a drop of 30% of market value, it implies US$3.5 billion value of the company is evaporated. You can decide whether the recent bad news is worth this amount of money.

Further reading:

You should have no problem getting the negative news recently (search google or go to Fidelity online for news). For a contrarian view, you may want to check out this article -- they have an interesting way to value the company for the technically minded.

4 Comments:

Anonymous matt said...

First time reader and sorry for disagreeing, but I thought you'd appreciate hearing my thoughts. I'm a M&A banker specializing in investment mgmt industry. Nobody prices asset managers on book value...it makes no sense. Balance sheets as a whole are generally forgotten. It's all about the cash flows. Occasionally a public or private company is priced on mult of revs but only where no profitability exists or synergies are very large.

Wednesday, November 15, 2006  
Anonymous JIM said...

I disagree as well. Acquisitions in the asset management business generally go horribly wrong. When they bought Citigroup's asset mgmt business they were already purchasing shaky assets. Once they are bought no institutional consultant is going to stick their neck out and recommend their funds. They'll go with something that isn't undergoing such massive changes. Couple this with the fact that they don't have a captive distribution system anymore and that equals outflows. $5B alone out of equity funds last quarter. This is still a train wreck. Miller's underperformance is a red herring.

Wednesday, November 15, 2006  
Blogger The banker said...

Jim, agree with you that asset management M&As doesn't have a good track record, and the $5B outflow is pretty bad. That's exactly why the share price slides by 30%. The question is, is 30% drop too much? In my view, I like Legg Mason's boldness in transforming itself from a US asset management company to a somewhat global one, especially from now on the growth in asset management industry is going to be out of the US. Anyway, most people do share your concerns and that's why this is a contrarian play. Let's see where LM will be in a year? Thanks for sharing!

Wednesday, November 15, 2006  
Blogger The banker said...

Jim, agree with you that asset management M&As doesn't have a good track record, and the $5B outflow is pretty bad. That's exactly why the share price slides by 30%. The question is, is 30% drop too much? In my view, I like Legg Mason's boldness in transforming itself from a US asset management company to a somewhat global one, especially from now on the growth in asset management industry is going to be out of the US. Anyway, most people do share your concerns and that's why this is a contrarian play. Let's see where LM will be in a year? Thanks for sharing!

Wednesday, November 15, 2006  

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