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Legg Mason: A Leg Up

One analyst says the long-term earnings outlook for this asset manager is strong and that its stock still has room to run.

Legg Mason (LM), now one of the world's largest asset management companies, should enjoy stronger growth over the next several years than its rivals, and that means its stock deserves to trade higher, says Banc of America analyst Michael Hecht.

Hecht upgraded Legg Mason to "buy" on Friday. He says above-average economic growth plus a promising year ahead for stocks bodes well for brokers and asset managers. And, after reevaluating his view of the sector, he now says Legg is his top pick.

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In a well-publicized asset swap last year, Legg shed its retail brokerage and capital markets assets in exchange for Citigroup's large asset-management business. As a result, Legg is now solely a money manager, offering mutual funds, advisory services for institutional investors and other products and services. Among its brands are Legg Mason, Royce and Brandywine.

The Citigroup deal, which more than doubled Legg's assets under management, was well received on Wall Street. Although integrating such a large acquisition is risky, it is ultimately expected to improve Legg's returns on capital and profitability.

Legg also purchased a fund-of-hedge-funds management company last year.

Hecht figures Legg should grow earnings 25% annually over the next five years, compared with 20% annual growth for its peers, on average. And he says the stock price ought to reflect this premium growth potential.

Legg's share price climbed more than 60% in 2005. Hecht sees the stock rising to $147 over the next year, the highest price target among brokerage analysts surveyed by Thomson First Call.

The share price jumped 4% on Friday. At $122, the stock trades at 22 times the $5.57 per share that analysts, on average, estimate the company will earn in calendar 2006.

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