Legg Mason, Inc. (LM)

whitepapers (46.66) Submitted: 12/12/06 4:47 PM : Start Price: $88.25 LM Score: -39.50

Legg Mason, Inc

Business:
Legg Mason, Inc. is a global asset management firm that is structured as a holding company. U.S. fund families: LM Funds, LM Partners Funds, Royce Funds and Western Asset Funds. *1

Legg Mason also reiterated its plan to cut its mutual fund lineup to 119 from 166 in order to reduce product overlap caused by the Citigroup acquisition. *2 This suggests to me a disciplined approach.


Undervalued Argument
7/25/06 Missed analysts expectations for revenue
Also assets under management actually fell because of fall in equities.
Only the second time in 60 quarters that the company posted a drop in assets under management. *3

5/10/06 Beat analysts expectations for continuing operations
Yet the stock price plummeted because savings from its acquisition of Citigroup's Asset Management had not materialised as quickly as some analysts expected. *4

4/11/06 (announcement) Legg Mason to Join S&P 500 *5

My Pitch
On the day of the announcement that Legg Mason would join the S&P500 the stock actually went down as it did on the day after as well. How could the market not see this as a positive? Now millions of Americans 401k and pensions plans will own stock in LM. It seems like a simple case of demand going up while supply stays the same.

My opinion is that the market is undervaluing the company because of the uncertainty involved with their swap with Citigroup. I think this is the best time to buy. Effective assimilation is going to happen, they’ve done this too many times now - not to know what they’re doing. They may have bitten off a little much last year acquiring Permal (fund of hedge funds) and Citigroup’s Asset Management business, but that short term digestion problem means long term profits for us investors.

I can’t remember where I read this. When asked what the company was going to do with it’s increase of cash reserves, Raymond A Mason responded that they would stay the course until their reorganization is complete: they would not raise dividends nor would they pursue new acquisitions. This sounded to me like a very rational approach especially when I consider the large one time dividend given by MRH just before the onslaught of Katrina. Just months afterward, MRH was looking to raise capital.

Based on these points, I purchased 20 shares on October 26, 2006.

Cheryl Gordon Krongard new board member. I'm not very excited about this new member. My gut feeling is that her philanthropic activities will come first and her board position behind. I'm also a bit pessimistic about her currently serving on USAir. “US Airways Group filed for bankruptcy protection Sunday for the second time in two years.” *6

4/19/06 new director W. Allen Reed
Former member Board of Executives NYSE
Just retired chair GM (General Motors) Asset Management Company *7

From US Airways 2004 Annual Report *8
Cheryl G. Krongard, 49
Ms. Krongard retired in 2004 as a Senior Partner of Apollo Management,
L.P. Ms. Krongard was the Chief Executive Officer of Rothschild Asset Management from 1994 to April 15, 2000. She served as Senior Managing Director for Rothschild North America from 1994 until 2000. She serves on the board of directors of the Iowa State University Foundation and is a lifetime governor elected in 1997. She is also chairperson of the Investment Committee for the Iowa State University Foundation. Ms. Krongard is also a member of the Dean’s Advisory Council, Iowa State University College of Business, and a Trustee of the Mount Sinai Medical Center. Ms. Krongard also serves as a Director of the City Meals on Wheels and Educate, Inc., a publicly traded company engaged in tutoring and learning (formerly Sylvan Learning). Ms. Krongard is Chairman of the Corporate Governance and Nominating and Strategy and Finance Committees and a member of the Human Resources Committee of the Board of Directors. She is also a director of US Airways Group.


Raymond A. “Chip” Mason, current president, CEO and chair, will continue as chairman and CEO after Mr. Hirschmann becomes president. *9
James W. Hirschmann, III, 45, as chief operating officer of the Company effective immediately. Mr. Hirschmann will retain the title of president, which he assumed on May 1, 2006. He is also the chief executive officer of Western Asset Management (fixed income) *10

Bill Miller, CFA, has been named Chairman and will continue to serve as Chief Investment Officer and portfolio manager of all accounts he currently manages, including the Legg Mason Value Trust and the Legg Mason Opportunity Trust. *11

Michael Mauboussin, chief investment strategist at Legg Mason his book More Than You Know: Finding Financial Wisdom in Unconventional Places, *12

Purchase Arguments

A Value Opportunity at a Value Manager – Motley Fool Article *13

Article about investors fleeing underperforming funds
Actually supports sticking with Bill Miller and his willingness to stick with his convictions *14

Many compelling values in the asset manager space have presented themselves in the recent market slide -- from big dogs like Legg Mason (NYSE: LM) and BlackRock (NYSE: BLK) to smaller players like Eaton Vance (NYSE: EV), and Federated Investors (NYSE: FII). *15

*01 http://tinyurl.com/yngp5q
*02 http://tinyurl.com/yngp5q
*03 http://tinyurl.com/yngp5q
*04 http://tinyurl.com/yycb7x
*05 http://tinyurl.com/ynf8b6
*06 http://tinyurl.com/y3o9tu
*07 http://tinyurl.com/tpedf
*08 http://tinyurl.com/y8jz7b
*09 http://tinyurl.com/y24dmm
*10 http://tinyurl.com/yj623y
*11 http://tinyurl.com/yf6upj
*12 http://tinyurl.com/y7sg48
*13 http://tinyurl.com/ylgsn7
*14 http://tinyurl.com/skyql
*15 http://tinyurl.com/y6s6rs

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