Financial Services Stocks

Legg Mason Inc Valuation – June 2018 $LM

Company Profile (excerpt from Reuters): Legg Mason, Inc., incorporated on January 13, 1981, is a holding company. The Company and its subsidiaries are principally engaged in providing asset management and related financial services to individuals, institutions, corporations and municipalities. The Company operates through Global Asset Management segment. Global Asset Management provides investment advisory services to institutional and individual clients and to the Company-sponsored investment funds. The Company, through its subsidiaries, 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. The Company has operations principally in the United States and the United Kingdom and also have offices in Australia, Bahamas, Brazil, Canada, Chile, China, Dubai, France, Germany, Italy, Japan, Luxembourg, Poland, Singapore, Spain, Switzerland and Taiwan.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of LM – June 2018

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 $2,972,262,474 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.96 Fail
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 92.87% Pass
6. Moderate PEmg Ratio PEmg < 20 13.90 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 0.77 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 1.96 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 2.35 Fail
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 $2.50
MG Growth Estimate 15.00%
MG Value $96.17
Opinion Undervalued
MG Grade B-
MG Value based on 3% Growth $36.22
MG Value based on 0% Growth $21.23
Market Implied Growth Rate 2.70%
Current Price $34.73
% of Intrinsic Value 36.11%

Legg Mason Inc does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings stability over the last ten years. The Enterprising Investor has concerns regarding the level of debt relative to the net current assets, and the lack of earnings stability over the last five years. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $1.09 in 2015 to an estimated $2.5 for 2019. This level of demonstrated earnings growth outpaces the market’s implied estimate of 2.7% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value above the price.

At the time of valuation, further research into Legg Mason Inc revealed the company was trading below its Graham Number of $59.43. The company pays a dividend of $1.12 per share, for a yield of 3.2%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 13.9, which was below the industry average of 22.96, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-27.85.

Legg Mason Inc performs fairly well in the ModernGraham grading system, scoring a B-.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$27.85
Graham Number $59.43
PEmg 13.90
Current Ratio 1.96
PB Ratio 0.77
Current Dividend $1.12
Dividend Yield 3.22%
Number of Consecutive Years of Dividend Growth 8

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Most Recent Balance Sheet Figures

Balance Sheet Information 3/1/2018
Total Current Assets $1,928,382,000
Total Current Liabilities $982,042,000
Long-Term Debt $2,221,810,000
Total Assets $8,152,534,000
Intangible Assets $5,730,014,000
Total Liabilities $4,300,398,000
Shares Outstanding (Diluted Average) 85,179,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $3.47
Mar2018 $3.01
Mar2017 $2.18
Mar2016 -$0.25
Mar2015 $2.04
Mar2014 $2.33
Mar2013 -$2.65
Mar2012 $1.54
Mar2011 $1.63
Mar2010 $1.32
Mar2009 -$13.99
Mar2008 $1.86
Mar2007 $4.48
Mar2006 $8.80
Mar2005 $3.53
Mar2004 $2.65
Mar2003 $1.78
Mar2002 $1.45
Mar2001 $1.53
Mar2000 $1.51
Mar1999 $1.03

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $2.50
Mar2018 $1.96
Mar2017 $1.20
Mar2016 $0.68
Mar2015 $1.09
Mar2014 $0.68
Mar2013 -$0.90
Mar2012 -$0.53
Mar2011 -$1.36
Mar2010 -$1.73
Mar2009 -$1.86
Mar2008 $4.22
Mar2007 $5.02
Mar2006 $4.74
Mar2005 $2.53
Mar2004 $1.95
Mar2003 $1.56

Recommended Reading:

Other ModernGraham posts about the company

Legg Mason Inc Valuation – June 2016 $LM
Stocks Trading Below Their Graham Number – May 2016
Stocks Trading Below Their Graham Number – February 2016
10 Companies Benjamin Graham Would Invest In Today – February 2016
13 Best Stocks For Value Investors This Week – 12/12/15

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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.

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