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
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

LM value Chart December 2015

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

LM Charts December 2015

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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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

The Best Stocks of the Financial Services Industry – September 2015
15 Best Stocks For Value Investors This Week – 9/4/15
Legg Mason Analysis – August 2015 Update $LM
Legg Mason Stock Analysis – May 2015 Quarterly Update $LM
34 Companies in the Spotlight This Week – 2/7/15

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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.

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