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How Legg Mason Is Shaking Things Up

By Sean Dalton – Jul 15, 2014 at 4:07PM

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How has the new CEO set a new direction for Legg Mason?

Source: Company.

From atop their scenic location in Baltimore's Inner Harbor, Joe Sullivan has a lot to celebrate as he ends his first year as Legg Mason (LM) CEO.

With the acquisition of QS Investors in March, consolidating of some of the company's principal subsidiaries and the repurchase of 9.7 Million shares, Sullivan and his team have made major shakeups in a company still working to adapt to a post-2008 financial environment.

While still an admittedly difficult year for this asset management company, the reorganization and restart of organic cash inflows should set investor's mouths watering. 

Current Status
The big story here is the reemergence of new capital flows into Legg Mason's coffers: For the first time since 2011, Legg Mason's Net Client Cash flows have gone positive.

For an asset management company, the ability to gradually stop client's withdrawals of funds and attract new investors is crucial for survival.

In 2012, LM suffered a loss of $27.5 billion worth of client cash flows, with a majority coming from redemptions and separate account flows. In FY 2013, LM had begun to patch the wound, losing only $11.7 billion worth of client cash flows. However, it seems like Legg's hard work on the sale desks has finally paid off, with a positive $8.3 billion in client cash flows for FY 2014.

This rise in organic client cash flows shows that Legg is finally starting to retain clients and win new business. Relying on its research and trading desk, Legg Mason has done a great job increasing and stabilizing its market returns to $30 billion up from $17 billion for FY 2012. With new additions of capital to its currently solid investment revenue, this should lead to successful and steady growth over the next few years.

Consolidation and Acquisitions
Mr. Sullivan has also had a lot on his plate in trying to realign the company internally.

In March of 2014, Legg Mason acquired QS Investors, the privately held investment management company to compliment their current company family. Paying $35 million for $4.1 billion assets under management ( or "AUM".) and $100 billion assets under advisory, Legg Mason has made a strong strategic investment in building the institutional investor  base and used the acquisition as an opportunity to realign the current subsidiaries.

QS Investors absorbed Batterymarch and Legg Mason Global Asset Allocation in an attempt to realize synergies across the subsidiaries, with management expecting effects to be clear in the FY 2015 annual report. Legg Mason is no stranger to consolidation and this reorganization should lead Legg Mason to be able to cross sell products and services from retail to institutional investors, but the company still expects to realize $30,000 in costs through the end of FY 2015 in March of 2015.

Why Choose Legg Mason
Unlike other financial companies, Legg Mason cannot rely on deposits or loans to supplement its capital market investments, making it a very competitive industry. Its competitors, Eaton Vance (EV) and Franklin Resources (BEN 2.28%) provide a good comparison.

MetricLegg MasonEaton VanceFranklin Resources
PEG Ratio 1.17 1.43 1.08
P/Book 1.23 6.77 3.58
P/Sales 2.24 3.32 4.49
ROA 3.92 9.83 14.4
ROE 5.97 29.13 22.17

With metrics like these, the Foolish investors should ask themselves why they should choose Legg Mason.

While the company's ROA and ROE are much lower than its peers, its price indicators show that Legg Mason appears undervalued at its current value and, with the increased growth and consolidations from its current acquisitions, should improve and allow the stock price to rise.

Additionally, Legg Mason seems to have recommitted itself to promoting shareholder value.

In FY 2014, LM repurchased 9.7 million shares and over the last four years has reduced its outstanding shares by 28%. Additionally, the company has increased its annualized quarterly dividend from $0.12 per share in March FY 2010 to $0.52 per share in March FY 2014, with expectations that it will increase going forward. In fact, over the last three years, shareholder recouped $1.3 billion from dividends and share buybacks. 

Final Thoughts: Things are looking good at Legg Mason
Although Legg Mason is still trying to get its footing back from the shakeup from the financial crisis, the management team has done a fantastic job of putting the company back on track. With positive investor inflows for the first time in years combined with its recent acquisition of QS Investors, Legg Mason has been able to reorganize itself into a stronger and leaner company with the intention of returning shareholder value.

This is one company that still has changes ahead of it, but it appears that its on the right path.

Sean Dalton has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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