Legg Mason Inc Valuation – December 2015 Update $LM
Benjamin 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 10 Most Undervalued Companies for the Defensive Investor – November 2015. 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 stock analysis showing a specific look at how Legg Mason Inc (LM) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Legg Mason, Inc. is a holding company. Through its subsidiaries, the Company provides investment management and related services to institutional and individual clients, company-sponsored investment funds and retail separately managed account programs. The Company offers its products and services directly and through various financial intermediaries. Its investment advisory services include discretionary and non-discretionary management of separate investment accounts in numerous investment styles for institutional and individual investors. Its investment products include proprietary mutual funds ranging from money market and other liquidity products to fixed income, equity and alternative funds managed in a wide variety of investment styles. The Company also offers other domestic and offshore funds to both retail and institutional investors and funds-of-hedge funds. The Company’s United States mutual funds consist of two groups of mutual and closed-end funds.
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Downloadable PDF version of this valuation:
ModernGraham Valuation of LM – December 2015
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
What kind of Intelligent Investor are you?
| Defensive Investor; must pass 6 out of the following 7 tests. | ||||
| 1. Adequate Size of the Enterprise | Market Cap > $2Bil | $4,459,037,931 | Pass | |
| 2. Sufficiently Strong Financial Condition | Current Ratio > 2 | 2.96 | Pass | |
| 3. Earnings Stability | Positive EPS for 10 years prior | Fail | ||
| 4. Dividend Record | Dividend Payments for 10 years prior | Pass | ||
| 5. Earnings Growth | Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end | -193.33% | Fail | |
| 6. Moderate PEmg Ratio | PEmg < 20 | 23.58 | Fail | |
| 7. Moderate Price to Assets | PB Ratio < 2.5 OR PB*PEmg < 50 | 0.97 | Pass | |
| Score | ||||
| Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor. | ||||
| 1. Sufficiently Strong Financial Condition | Current Ratio > 1.5 | 2.96 | Pass | |
| 2. Sufficiently Strong Financial Condition | Debt to NCA < 1.1 | 0.91 | Pass | |
| 3. Earnings Stability | Positive EPS for 5 years prior | Fail | ||
| 4. Dividend Record | Currently Pays Dividend | Pass | ||
| 5. Earnings Growth | EPSmg greater than 5 years ago | Pass | ||
Stage 2: Determination of Intrinsic Value
| EPSmg | $1.68 |
| MG Growth Estimate | 15.00% |
| MG Value | $64.78 |
| Opinion | Undervalued |
| MG Value based on 3% Growth | $24.40 |
| MG Value based on 0% Growth | $14.30 |
| Market Implied Growth Rate | 7.54% |
| Current Price | $39.68 |
| % of Intrinsic Value | 61.25% |
Legg Mason Inc qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the insufficient earnings growth or stability over the last ten years along with the high PEmg ratio.  The Enterprising Investor is only initially concerned by the insufficient earnings stability over the last five years . As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.
As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from a loss of $0.53 in 2012 to an estimated gain of $1.68 for 2016.  This level of demonstrated earnings growth outpaces the market’s implied estimate of 7.54% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above 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.
Stage 3: Information for Further Research
| Net Current Asset Value (NCAV) | -$6.02 |
| Graham Number | $50.67 |
| PEmg | 23.58 |
| Current Ratio | 2.96 |
| PB Ratio | 0.97 |
| Dividend Yield | 1.81% |
| Number of Consecutive Years of Dividend Growth | 6 |
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Useful Links:
| ModernGraham tagged articles | Morningstar |
| Google Finance | MSN Money |
| Yahoo Finance | Seeking Alpha |
| GuruFocus | SEC Filings |
Most Recent Balance Sheet Figures
| Balance Sheet Information | Sep15 |
| Total Current Assets | $1,765,540,000 |
| Total Current Liabilities | $596,459,000 |
| Long-Term Debt | $1,059,902,000 |
| Total Assets | $6,877,954,000 |
| Intangible Assets | $4,634,263,000 |
| Total Liabilities | $2,420,441,000 |
| Shares Outstanding (Diluted Average) | 108,784,000 |
Earnings Per Share History
| Next Fiscal Year Estimate | $2.77 |
| Mar15 | $2.04 |
| Mar14 | $2.33 |
| Mar13 | -$2.65 |
| Mar12 | $1.54 |
| Mar11 | $1.63 |
| Mar10 | $1.32 |
| Mar09 | -$13.99 |
| Mar08 | $1.86 |
| Mar07 | $4.48 |
| Mar06 | $8.80 |
| Mar05 | $3.53 |
| Mar04 | $2.65 |
| Mar03 | $1.78 |
| Mar02 | $1.45 |
| Mar01 | $1.53 |
| Mar00 | $1.51 |
| Mar99 | $1.03 |
| Mar98 | $0.87 |
| Mar97 | $0.69 |
| Mar96 | $0.54 |
Earnings Per Share – ModernGraham History
| Next Fiscal Year Estimate | $1.68 |
| Mar15 | $1.09 |
| Mar14 | $0.68 |
| Mar13 | -$0.90 |
| Mar12 | -$0.53 |
| Mar11 | -$1.36 |
| Mar10 | -$1.73 |
| Mar09 | -$1.86 |
| Mar08 | $4.22 |
| Mar07 | $5.02 |
| Mar06 | $4.74 |
| Mar05 | $2.53 |
| Mar04 | $1.95 |
| Mar03 | $1.56 |
| Mar02 | $1.39 |
| Mar01 | $1.28 |
| Mar00 | $1.08 |
Recommended Reading:
Other ModernGraham posts about the company
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Disclaimer:
The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.
