Legg Mason, Inc. (LM)

XMFMarathonMan (< 20) Submitted: 10/15/06 5:13 PM : Start Price: $86.15 LM Score: -43.46

For my thesis on Legg Mason (NYSE: LM), here is an excerpt from my article, "Legg Mason: Good Buy or Goodbye?" (The Motley Fool, 10/12/2006):

"As a rough rule of thumb, I use 2% of AUM, plus tangible book value, to value asset managers. By that measure, and by comparison with its peers (based on forward P/E and the PEG ratio), Legg Mason looks cheap. My own quick-and-dirty discounted cash flow (DCF) valuation yields a share price range of $103.40 - $126.20 (implying that the closing price on 10/11 contains a margin of safety of 16%-31%), based on the following assumptions:

* Cost of equity = 10.5%;
* Growth rate = 15%;
* Excess return period = 10 years;
* Operating profit margins = 25%-30%;

Conversely, Wednesday's closing price of $87.15 implies a growth rate of 11% (keeping the other assumptions unchanged and operating margins at 27.5%).

With this profit warning, Legg Mason will have missed its earnings for three consecutive quarters. As such, its stock is now a "show me" investment for short-term investors, who will only return once they are certain that the company has all its ducks in a row. However, certainty has a price; in the meantime, I think the odds favor patient investors who take advantage of the company's temporary difficulties to acquire a good business at an attractive price."

You can find the full article here: http://www.fool.com/news/mft/2006/mft06101225.htm

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