Tuesday Winners: Legg Mason: More Bullish than its Clients?
Shares of asset manager Legg Mason (NYSE: LM) are up +11% today to an 18-month high, after delivering modest upside to first-quarter forecasts on Monday evening. Shares are likely getting such a strong boost from an announced restructuring plan that will take $150 million out of its costs over the next two years, which should boost per-share profits by about $1. Management also announced plans to buy back $1 billion in stock, which would remove about 30 million shares – or 20% of the share count—from the market. Were those moves to already be in place today, Legg mason would have announced quarterly per share profits of around $0.69 a share, rather than the reported $0.39.
And if we annualize that pro forma profit outlook, then shares would trade for a reasonable 12 times profits, rather than the more bloated 20 times the actual profit run rate. Whether you find that pro forma multiple of 12 to be appealing depends on your outlook for the stock market. Market bulls think this rally can be sustained, and even if the major indices don’t rise much further, a stable market is likely to help Legg Mason keep rebuilding its assets under management (AUM) investors wade back into the market.
But market bears are quick to note that another market correction is likely to keep retail investors on the sideline, after the horrendous results they saw in 2008 and the first half of 2009. And clients have been taking their money out of Legg Mason’s funds for five straight quarters. AUM only grew in the last year because the value of the investments rose sharply. AUM would otherwise have shrunk by $82 million, or about 12%.
If you are bullish on the market, (and that massive $1 billion buyback should surely assuage some concerns), then you may want to wait until Legg Mason can at least show that AUM isn’t shrinking on an organic basis. After all, the retail appeal of Legg Mason’s funds is the primary reason for owning this stock.
The credit cards are starting to come out again. In recent weeks, retailers that cater to female shoppers have posted strong results, capped off by this morning’s robust sales and profit report from Maidenform (NYSE: MFB), which focuses on women’s undergarments. Maidenform noted that first quarter sales rose 25%, and mid-teens growth for the remainder of the year looks sustainable. And despite today’s +15% jump in the stock, shares are still reasonably-priced at around 14 times projected 2010 profits.
To be sure, women’s apparel is a largely mature industry, and this kind of growth cannot be sustained over the long-haul. But if history is any guide, this growth spurt can be sustained as long as unemployment is dropping. Sure, the formal unemployment rate rose to 9.9% last month, but that’s only because more people are now starting to look for work. The important stat: 200,000 jobs have been created, on average, in each of the last four months. And that’s fueling purchases of all kinds of items, such as women’s apparel.
Let this winner ride. Or, wait for a pullback, which is inevitable in this choppy market. That opportunity has already arisen for shares of Christopher & Banks, another female-focused retailer. Shares are off nearly -15% since late April, despite a very bullish quarterly report.
We profiled carbon-fiber marker Zoltek (Nasdaq: ZOLT) in this article back in February, noting that the company should see a rebound in demand within a few quarters. Although Zoltek’s first-quarter results once again missed the mark, the company announced that orders picked up nicely in recent weeks, which should enable Zoltek to start beating estimates instead of trailing them. The bullish outlook sent shares up more than +10% in Tuesday trading.
Carbon fiber, which is more expensive than steel or aluminum, has always held a great deal of promise, but has often been slow to find industrial applications. Airplane makers were the first to embrace the technology, and the auto industry is now ramping up as a second major new opportunity for the material. Zoltek jumped the gun and put in way too much manufacturing capacity. If demand is really picking up, investors should see a great deal of margin leverage, as all of that overhead is absorbed.