Legg Mason: Could Be a Bargain

Large-scale acquisitions rarely come off without kinks. Indigestion is often the culprit, and the swap of Legg Mason's brokerage unit for Citigroup's money-management business is no exception. Shares of Baltimore-based Legg Mason (symbol LM) soared after the deal was announced a year ago. But the stock has been sliding in recent months, and it dropped sharply after the company's most recently reported earnings missed analysts' estimates by a long shot. At $96, Legg Mason's stock is nearly 30% off its February high.

The discounted shares could be a buying opportunity for value-minded investors, analysts at Friedman Billings Ramsey told clients Wednesday after meeting with Legg Mason's senior managers the day before. "We believe the sell-off more than discounts the risks inherent in the integration," wrote analysts Matt Snowling and Michael Parker. "With an improving earnings picture likely by September, we believe Legg Mason once again provides significant upside opportunities for investors willing to ... look through some near-term noise and choppy market conditions." Snowling and Parker upgraded Legg Mason from "market perform" to "outperform" and maintained a 12-month price target of $125.

The $3.7-billion purchase of Citigroup's asset management business made Legg Mason the country's fifth-largest money manager. The firm's assets currently top $850 billion.

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Legg Mason reported that earnings rose 28%, to $1.03 a share, in the fourth quarter of its 2006 fiscal year, which ended in March. But Wall Street had been expecting a profit of $1.25 a share. Following the earnings announcement, the company said cost savings from the Citigroup acquisition had not materialized as quickly as some analysts expected. Chairman and chief executive Raymond "Chip" Mason said the company is adjusting to its new size and that Legg Mason's new earnings power would become more evident by the September quarter.

Legg Mason's shares trade at 18 times the $5.35 per share that analysts expect the company to earn in the fiscal year that ends next March, according to Thomson First Call.