It is not hard to compare LM's assets under management vs. peers and eventual earnings and PE ratios and recognize some serious differences in valuation. Here's Leggs problem. Their assets they bought from Citigroup have had redemption problems. Legg recently was hit because Miller's Value fund didn't do well during the recent credit crunch and perceptually, since they were already having redemptions and Miller is so visible, the stock got hit again. Let's separate some stuff for a second. LM equity AUM is over $300 B. Miller's Value Trust is about $19 (from memory). The problem is redemptions primarily of Citis old assets, which were bought on the cheap in the first place. Legg and Citi have now renegotiated their sales agreement, which will allow LM some additional channels to sell their funds. This is a good thing. I think Miller will eventually come through, but that belies that point that there are a lot more assets and managers than just Miller. There is also a cash flow kicker on Legg, from some deferred taxes which are associated with the accounting because of the acquisition. That means actual CF earnings is about 13.5x. You won't find anything near that level of valuation in comparable asset managers.
It will take some time for Legg to turn around, but I think they will. Asset managers can gain a lot of operating leverage once the equity part starts to pull through. This is Leggs problem because of the redemptions, but if/once it starts to happen, they're valuation will be much higher. --as long as the current environment holds up. :)
$84.1 (09/29/07)
