Legg Mason Shares Indicated Higher Following Credit Suisse Upgrade

Credit Suisse’s Craig Siegenthaler upgraded the rating for Legg Mason Inc LM from Neutral to Outperform, while raising the price target from $39 to $49.

Legg Mason’s shares are trading at an 18 percent discount to its peers. Analyst Craig Siegenthaler believes that the discounted valuation of Legg Mason’s stock is partly due to the company’s current leverage at 2.7 times its net debt/EBITDA. This compares with the peer group range of 0.5x-1.0x.

Debt Balance

Legg Mason is expected to reduce its net debt ratio over the next two years to 2.1-2.5x. “We also
believe LM’s diverse and stable profit base (includes a large contribution from fixed income and alternative products), should minimize the potential to trip its 3.0 debt/EBITDA covenant on its revolver,” Siegenthaler stated.

The company may also divert its free cash flow for reducing its net debt, if the need arises. “LM stock could generate a 56% total return over next 12 months – but estimate it may take two years or longer to return to 1H15 highs,” the Credit Suisse report stated.

History Of Strong Capital Returns

Legg Mason returned more than $2B to shareholders over the past 5 years. Siegenthaler expects the company to lower share count by around 20 percent over the next couple of years, via $90M per quarter in buybacks.