According to a filing with the SEC, billionaire Nelson Peltz’s Trian Partners is down to 12.9 million shares of Legg Mason, Inc. (NYSE:LM). The fund still owns 9.5% of the shares outstanding, and according to a statement issued by Trian it did not technically sell shares but transferred ownership to an investor. At the end of June Trian had reported a position of 14.7 million shares on the fund’s 13F filing (find more stocks owned by Trian Partners), making it one of the fund’s top ten holdings at that time. However, the timing of this new filing is interesting as in mid-September Legg Mason had announced that its CEO would be leaving the asset manager and investment advisor effective October 1st. We have to wonder if there is a connection between Trian’s transaction- even if it was not driven by Peltz- and the management shakeup.
Trian has stated that it continues to consider Legg Mason, Inc. a good investment, even as the stock has only risen 1% this year while the S&P 500’s gain has approached 15%. In the first quarter of the company’s fiscal year, which ended in June, Legg Mason reported that revenue had fallen 12% from the same period a year ago. Investment advisory fees and distribution fees, the two primary sources of business, were both down. The company was able to cut costs- in particular, compensation and benefits were down 10%- but the existence of some fixed costs brought operating income down 24%. Earnings were negative, but this was entirely due to a loss on debt extinguishment; still, we would say that the company is struggling after growing its earnings at only a 4% annualized rate between its fiscal year ending in March 2010 and its fiscal year ending in March 2012.
Legg Mason, Inc. trades at 11 times forward earnings estimates, but this depends on the company achieving earnings growth this year over last year and then delivering a 55% increase in earnings per share next year. Even with the loss on debt extinguishment being non-recurring, the recent history of revenue and operating income do not look encouraging to us.
Our database of 13F filings shows other interest in Legg Mason at the end of the second quarter of the year. Billionaire David Einhorn’s Greenlight Capital owned 3.4 million shares, a very small decrease from what the fund had owned at the beginning of April, while Israel Englander’s Millennium Management raised its stake by 69% to a total of 1.1 million shares. See more stock picks from Greenlight Capital and Millennium Management.
Legg Mason can be compared to BlackRock, Inc. (NYSE:BLK), Charles Schwab Corp (NYSE:SCHW), Franklin Resources, Inc. (NYSE:BEN), and T. Rowe Price Group, Inc. (NASDAQ:TROW) to see if any of these peers offer a better value. For the most part, these companies are seeing the same poor industry dynamics as Legg Mason: BlackRock and Franklin Resources both saw their revenue and earnings fall in their most recent quarter compared to the same period a year ago. However, they do not seem to have been as hard hit as their revenue declines were smaller and their earnings declines were smaller than Legg Mason’s fall in operating income. At forward P/Es of 12 to 13, they are priced at about the same level and we think they could be safer investments. Charles Schwab and T. Rowe Price are considerably more expensive than these three companies, as both of these pairs trade at 17 times analyst earnings expectations for next year. While both of these companies grew their revenue and earnings last quarter versus a year earlier, that degree of a price premium over Legg Mason might be too high and their dividend yields are only a hair higher.
Trian says it’s not really selling out of Legg Mason, but we think it could be a smart idea to do so. Even if Wall Street analysts are right about its prospects- 55% EPS growth next fiscal year over this one- it doesn’t trade much cheaper than the more stable (and larger) BlackRock and Franklin Resources.