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Legg Mason Inc. Message Board

  • madmanshooter madmanshooter Oct 12, 2006 9:30 PM Flag

    Motley Fool says bargain

    Motley Fool:

    "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."

25.93-0.54(-2.04%)Feb 9 4:00 PMEST