Monday, June 15, 2009

Why is Legg Mason Rising?

Legg Mason (LM) has garnered some attention recently, including a thumb's up from Grant's Interest Rate Observer on May 15th. But what explains the stock moving higher on a down 200+ day. This weekend's Barron's may have helped a bit. Mario Gabelli (isn't he in jail) is quoted as saying:

Among new names, Legg Mason sold its brokerage to Citigroup in 2005, and bought Citi's money-management arm. Legg is selling at 24. There are 143 million shares outstanding, and the company has to issue another 23 million in connection with an equity instrument that matures in 2011. Assuming 166 million shares, the company has an enterprise value of $3.7 billion. It has about $2 billion of cash and $2 billion of debt.

CEO Mark Fetting is doing a terrific job of overseeing the different businesses, which include Legg Mason Capital Management, run by Bill Miller, and other fund groups run by Chuck Royce, Buzz Zaino, Whitney George and others. The biggest, based on assets under management, is Western Asset Management, the fixed-income specialist. The businesses have benefited from coordinated marketing.

Ebitda [earnings before interest, taxes, depreciation and amortization] will be $800 million to $1 billion in three or four years. Legg could earn 80 cents for the year ending March 2010 and $2 the following year. You have focused management, an improved balance sheet, the elimination of problems that were bogging the company down, and products that could enjoy significant growth. You could get a double in the stock.

So, is that it? One Barron's quote and Legg bucks the trend? NO.

On June 11th, Blackrock agreed to buy Barclay's Global Investors (BGI) for $13.5 billion. Near as I can tell, BGI has $1.4 trillion under management. So that's $104 in assets under management per dollar of purchase price. Round numbers people... you get the point. Currently LM's price implies $176 in assets under management per dollar of price.

Keep in mind that Blackrock's assets under management equate to $59 per $1 of purchase price. Do you see the rationale for the deal? Pretty obvious... Larry Fink is a bootstrapper!

To recap (aum per $ of enterprise value):

LM = 176
BGI = 104
BLK = 59

BGI and Blackrock are certainly better managed than Legg Mason. I have long considered it one of the poorest run asset managers around. Ironically, it also has the 2nd worst Investor Relations department around (My vote for THE worst IR Dept? Stay tuned.) Nonetheless, the list of candidates for this dubious honor is long.

This is NOT a commentary on Legg's underlying units like Royce and Private Capital or even Bill Miller. They are all well-respected for a reason. Someone should be able to realize the full potential of these assets, but the company remains in the value gutter.

Gabelli's call for a double in LM probably isn't a stretch. The chasm between asset manager valuations is closing.


  1. Great article and comparison. Just wondering: Should the type of assets they (LM) manage be considered? If my memory serves me right, LM has mostly fixed income assets, which generally have lower fees than, say, equity funds, etc. How does this compare to BGI or BLK?

    Thanks again for sharing your thoughts!

  2. LM does have some lower margin assets, including money market funds. This may make the comparison less than perfect, but BGI's ETF assets are lower margin as well, so the asset mix may not actually skew things much. I have not done an in depth analysis of the difference, but I believe the magnitude of the value disparity is so great that it overwhelms these considerations. Thanks for the probing question.