"Running the numbers So is there value here? 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."