Legg Mason Inc. Quarterly Valuation – July 2014 $LM

Lm_logoBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Undervalued Companies for the Enterprising Investor with High Dividend Yields.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Legg Mason (LM) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Legg Mason, Inc. (Legg Mason) is a global asset management company. The Company, through its subsidiaries, provides investment management and related services to institutional and individual clients, company-sponsored mutual funds and other pooled investment vehicles. It offers these products and services directly and through various financial intermediaries. It provides its asset management services through a number of asset managers, each of which generally markets its products and services under its own brand name and, in many cases, distributes retail products and services through a centralized retail distribution network. Its investment advisory services include discretionary and non-discretionary management of separate investment accounts in a number of investment styles for institutional and individual investors. In July 2014, it acquired Martin Currie, based in the United Kingdom. Effective 24, July, 2014, Legg Mason Inc acquired Martin Currie Investment Management Ltd.
LM Chart

LM data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 - FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years - FAIL
  4. Dividend Record – currently pays a dividend - PASS
  5. Earnings growth – EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price $50.98
MG Value $26.31
MG Opinion Overvalued
Value Based on 3% Growth $9.91
Value Based on 0% Growth $5.81
Market Implied Growth Rate 33.05%
Net Current Asset Value (NCAV) -$2.20
PEmg 74.60
Current Ratio 2.59
PB Ratio 1.26

Balance Sheet – 3/31/2014

Current Assets $2,128,400,000
Current Liabilities $821,200,000
Total Debt $1,038,800,000
Total Assets $7,111,300,000
Intangible Assets $4,412,300,000
Total Liabilities $2,386,600,000
Outstanding Shares 117,170,000

Earnings Per Share

2014 $2.33
2013 -$2.65
2012 $1.54
2011 $1.63
2010 $1.32
2009 -$13.85
2008 $1.86
2007 $4.48
2006 $3.35
2005 $3.53

Earnings Per Share – ModernGraham

2014 $0.68
2013 -$0.89
2012 -$0.51
2011 -$1.33
2010 -$2.06
2009 -$2.54

Dividend History

LM Dividend Chart

LM Dividend data by YCharts

Conclusion:

Legg Mason is suitable for Enterprising Investors but not for Defensive Investors.  The Defensive Investor is concerned with the poor earnings stability and lack of growth over the last ten years, and the high PEmg ratio.  The Enterprising Investor’s only concern is the lack of earnings stability over the last five years.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities including a review of ModernGraham’s valuation of Citigroup (C) and ModernGraham’s valuation of Franklin Resources (BEN). From a valuation side of things, the company appears to be overvalued after growing its EPSmg (normalized earnings) from a loss of $2.06 in 2010 to an estimated $0.68 for 2014.  This level of demonstrated growth does not support the market’s implied estimate of 33.05% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well below the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Legg Mason Inc. (LM)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Legg Mason Inc. (LM) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.


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