Legg Mason Brexit Selloff Creates Buying Opportunity Says Citi

Shares of Legg Mason Inc LM have lost 15 percent through June. Citi’s William R Katz maintained a Buy rating for the company, with a price target of $45, saying that the Brexit and buyback overhangs seemed excessive.

Smaller Brexit Risk Than Feared

Legg Mason had previously indicated that 13 percent of company-wide revenues were generated in the UK. Management clarified on June 29 that merely 20 percent of the company’s UK revenues were received in GBP, which represents only 3 percent of total revenues.

Moreover, only 3 percent of long-term AUM was exposed to the UK markets, while only 2 percent was exposed to GBP. “Our revised analysis shows an onerous scenario (15% drop in markets and 20% swing in FX), having a $0.07 impact on F17 Operating EPS (3%),” analyst William Katz wrote.

Leverage Concerns Overdone

Investors have also been concerned about potential buyback ability, in view of the recent market volatility. “While our analysis shows C2Q16 EBITDA is close to buyback limits (65% of Bank adjusted EBITDA), we believe LM has significant flex going forward to maintain (or even increase) buyback, even if markets do retrench,” Katz commented.

The EPS estimates for FY17, FY18 and FY19 have been lowered from $2.05 to $2.02, from $3.28 to $3.24 and from $3.72 to $3.71, respectively.