Legg Mason: Value Investing?
All good things must eventually come to an end. Unless star manager Bill Miller pulls a giant rabbit out of his hat, Legg Mason Value will trail Standard Poor's 500-stock index this year, bringing to a close the fund's remarkable streak of beating the benchmark index 15 consecutive years. Through November 30, Miller's fund was up 4.5% in 2006, lagging the SP by nearly ten percentage points.
The performance of Legg Mason's stock has been similarly disappointing. The shares (symbol LM) have slumped more than 20%, compared with a 14% return for the SP. Poor performance by high-profile portfolio managers such as Miller didn't help. Wall Street also pummeled the company for missing earnings estimates three straight quarters after Legg's big acquisition of Citigroup Asset Management.
Steve Roge, manager of Roge Partners Fund (ROGEX), thinks Legg Mason's stock is extremely undervalued. First, expecting Miller to continue to perform miserably is a little like wondering if Joe DiMaggio will ever get a hit again after the end of his 56-game hitting streak. "Bill Miller hasn't suddenly gotten stupid over the last year," says Roge. More important, the company is far bigger than Miller -- besides the recent Citi addition, subsidiaries include Royce Associates, a leading small-cap manager; Western Asset Management, one of the largest fixed-income families; and Brandywine Global (which is distinct from the firm that manages the Brandywine mutual funds).
Investors like to look at assets under management when they value fund managers, who after all levy fees on those assets every year. Roge says an asset manager with the depth, franchise value and growth potential of Legg Mason should fetch a valuation of at least 2% of assets under management. For example, Baltimore cross-town rival T. Rowe Price sells for nearly 4% of assets, and shares of Eaton Vance and Nuveen trade at more than 3% of assets.
Shares of unloved Legg Mason closed Decembers 1 at $94.97, down $0.39 for the day. That's equivalent to just 1.6% to 1.7% of Legg Mason's assets under management, which are approaching $900 billion. Analysts, on average, expect the company to earn $4.39 a share for the year that ends next March and $5.26 per share for the March '08 fiscal year. Roge thinks Legg Mason's earnings can continue to grow 10% to 12% a year and figures the stock should sell for at least $115. Bill Miller could have used more gains like that this year.