More analysis on LM (Legg Mason)) by Dr. Paul Price

IMHO, a buy with an excellent margin of safety if < $70

Get a 'Legg' Up - Legg Mason - LM

February-27-2008

Legg Mason, Inc. [NYSE:LM] Feb 26 [10:30 AM price] $69.70
52-week range: $66.15 - 106.36 Yield = 1.38%

Legg Mason is a global asset management company. Through its subsidiaries it offers investment management to institutions, private investors, corporations and government entities. Branded units include Legg Mason Capital Management, Royce & Associates, and western Asset Manangement. As of March 2007 assets under management were $968.5 billion. They employ around 1350 financial advisors in 127 offices throughout the mid-Atlantic and mid-South regions of the United States.

Despite the present tough stock market environment LM is finishing its FY 2007 with what should be all-time record revenues and earnings. EPS for the FY ending March 31 are likely to cme in around $4.80/share up from $4.48 in FY 2006. Preliminary consensus estimates for FY 2008 revolve around $4.95/share.

Legg Mason has shown tremendous growth since 1994. EPS have grown dramatically from [split adjusted] $0.33 in FY 1994 to this year's $4.80. Dividends have increased from $0.11 annually to today's $0.96. Book Value/share has risen from $4.62 to over $53 during that same period.

Amazingly, Legg Mason shares are available today near their lowest absolute price point in almost three years! At the current quote of $69.70 LM shares are just over 14.5x trailing earnings despite the fact that EPS have shown a CAGR of 17.5% over the past 5 years. The dead low trades for 2005 - 2006 - 2007 were $68.10, $81.00 and $68.40 respectively.

There was an insider buy on Feb. 1 of 13,590 shares at $73.85/share.

Large instituitional holders [as of YE 2007]:

Dodge & Cox: 5.41%
FMR [Fidelity funds]: 3.81%
T.Rowe Price: 3.63%
Barclays Global: 3.28%
State Street: 3.11%
Vanguard Group: 3.05%
Third Avenue Mgt: 2.52% [Marty Whitman]
Goldman Sachs: 2.32%
Franklin Resources: 2.04%

Guru holders [not mentioned above]:

Robert Olstein
Jean-Marie Eveillard
Richard Snow
Brian Rodgers
Chris Davis
Ruane Cunndiff
Ron Baron

LM shares have typically traded with 'growth stock' multiples because of their stellar long-term numbers. Their 10-year median P/E has been 19x. Value Line is assuming an 18 P/E for their 3 - 5 year projections and I think that is a reasonably conservative way to go.

18 times FY 2008's estimate of $4.95 brings me to a target price of $89.10 or up 27.8% from the quote as I'm writing. Legg's dividend is 1.38% making for total return potential of close to 30% over the next 12 months.

Is this reasonable? LM shares hit peak prices of $129, $140 and $110.20 in 2005, 2006 and 2007 so investors have paid well higher than my goal price year after year [when fundamentals were not as good as they are today].

My expectations may end up being way too restrained based on those previous trading peaks in Legg Mason shares. Value Line notes that LM shares earned a 95th percentile ranking for stock 'price growth persistence' within their 1700 stock universe.