Jeremy Allen Jeremy Daum Mary SemichBuy Report

Overview Per Share DataNYSE: LM Earnings: $8.91Recent Price: $94.25 Revenues (ttm): $28.0952 Week High: $140.00 Book Value: $45.4852 Week Low: $81.01 Cash: $8.94

Mkt. Cap.: $12.6B Insider Ownership

Shares Out. (Mil):133.5 Insiders own 2.47%

Beta: 1.46 Past Six Months:Sector: Financial 15,000 (0.4%) net gain

Industry: Investment Services

Legg Mason (LM)

At A Glance: Legg Mason Inc., incorporated in 1981, is a global asset management

Fiscal Year Ends: March 31 company. Acting through its subsidiaries, LM provides investment

Div & Yield: 0.84/shr (0.90%) management and related services to institutional and individual clients,

Payout Ratio: 8% company-sponsored mutual funds and other investment vehicles. The

Avg. Daily Volume: 1.61 Mil Company offers these products and services directly and through various

Headquarters: Baltimore, MD financial intermediaries. It divides its business into three divisions: Mutual

Employees: 3,820 Funds/Managed Services, Institutional, and Wealth Management. Within

Membership: S&P 500 each of its divisions, the Company provides its services through a number

S&P 1500 Super Comp. of asset managers, which are individual businesses, each of which is housed

in one or more different subsidiaries, which typically market their products

and services under their own brand name. (Description from Reuters.com)

Recommendation: Buy Full Position (approx. 530 shares)-Strong sales growth history & potential-Stock has a lot of room to “grow” in industry-Profitable Industry-Positive Signaling-LM is undervalued by the market; positive stock growth prospects

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Table of Contents

Company Profile ………………………………………………….…………..3

Company News …………………………………………………….………..4

Board of Directors ……………………………………………….…….. 5

Company Awards …………………………………….………………..6

Worldwide Locations ………………………………………………….…..7

Company History ………………………………………………………….…..8

Competitive Landscape.............................................................................9

SWOT Analysis......................................................................................

.11

Porter’s Five Forces............................................................................12

Institutional Ownership............................................................................13

Analyst Recommendations.................................................................13

Financial Ratio AnalysisProfitability Ratios .....…………………………………………….

……13Management Efficiency ………………………………………….

….14Growth Rates ………………………………………………….….14

Price Performance............................................................................15

Valuation RatiosPeer Group Analysis.................................................................16

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P/E ……………………………………………………………………..16P/S ……………………………………………………………………..17P/B ……………………………………………………………..17P/CF ……………………………………………………………….….....18

Pro Forma Income Statement.................................................................19

Financial StatementsIncome Statement …………………………….

……….21Balance Sheet ………………....…………………………..22Statement of Cash Flow.................................................................23

Value Line Report …………………………………….……………………….24

Company Profile1

BackgroundLegg Mason is a global asset management firm with a large

market cap. It was founded in 1970 with the merging of the two brokerage firms Legg & Co. and Mason & Co. The new company moved headquarters to Baltimore, Maryland where it remains to this day. Legg Mason began as a regional brokerage and assets grew progressively through the years. It provides investment management through a variety of subsidiaries and related services to institutional clients. It operates in three major divisions: Mutual Funds and Managed Services, Institutional Services and Wealth Management Services. Acquisitions and transactions in the past ten years have enabled the company to double their assets under management as well as increase their international reach.

Corporate InfrastructureThe three divisions of Legg Mason are unique and help diversify

the company while keeping it focused on asset management. The first division, Mutual Funds and Managed Services, is centered on various domestic and international mutual funds. Legg Mason has many subsidiaries working in this division, each with a specialization in a particular kind of mutual fund. The subsidiary Royce Funds for example, focuses on small-cap domestic funds, while the Legg Mason Funds specialize in tax-free equity securities and international funds.

1 www.leggmason.comwww.Reuters.comwww.Valueline.com

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There are literally hundreds of mutual fund offerings, which can be tailored to the needs of the client.

The Institutional Division consists of the actual asset management operations. The division is also made up of smaller subsidiaries that help manage client and institutional portfolios around the world. These clients include corporations, insurance companies, endowments, foundations and governments.

The third division, Wealth Management Services is the newest addition and provides customized management for high-net-worth clients. The newly acquired Permal Group added international clients, while other domestic subsidiaries cater to certain regions, strategies and different target risk/return objectives.

Recent AcquisitionsIn 2006, Legg Mason made two large moves that greatly

increased their affect on the international market. The first of these was essentially swapping companies with Citigroup Inc. Legg Mason acquired virtually all of Citigroup’s international asset management business in return for their Private Client and Capital Markets businesses. This move enabled Legg Mason to focus entirely on asset management and to gain more access to foreign markets. All of Citigroup’s US equities are currently being merged into those of Legg Mason’s, while the majority of international equities are being renamed to Legg Mason International Equities (LMIE.) The LMIE now gives Legg Mason the access to investment professionals in almost every major city across the globe. The acquisition brought a total of $408.6 billion in assets, up from $374.5 in 2005. However, the transaction is not without faults, as this was the single largest and most complex acquisition the company has taken on to date. The process has proved to be more time consuming and costly that originally thought. In addition, investors remain wary as they wait to see how everything will settle out. Some assets have been lost with the transfer of original Citigroup clients and several class action law suits have been filed against Legg Mason claiming they did not effectively merge the companies as planned. All this looms as a large question mark over the company, with an original downturn in the stock followed by a recent rally. Investors remain uncertain, while analysts continue to hold the stock at “outperform.”

This year also brought about the acquisition of The Permal Group, which is a fund-of-hedge-fund manager. The addition of Permal Group gave Legg Mason access to a new group of high net-worth clients in more than 75 different countries. The total gain on assets from Permal resulted in $17.5 billion. It has also grown by 31% in the first five months since it has been taken over by Legg Mason.

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Legg Mason is an extremely large company, but well diversified while maintaining a central focus on asset management. The company hopes to experience increased growth abroad with its new acquisitions, while maintaining a stronghold on the financial market in the United States.

Recent Company News

10/19/06: Class action suit filed against Legg Mason by the Law Offices of Howard G. Smith

10/21/06: Legg Mason Value Trust sends letter to shareholders

10/23/06: Pittsburgh Law Office files class action suit against Legg Mason on behalf of investors

10/24/06: Announced that third quarter profits were up 19%, but fell shy of expectations

10/27/06: Debate about whether or not Bill Miller will be able to pull off a 16th straight year of beating the S&P 500

10/30/06: Lula da Silva’s reelection in Brazil coupled with falling interest rates in the country looks promising for Legg Mason’s subsidiary, Batterymarch

Board of Directors

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Awards

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Raymond Mason: (seated right)Raymond Mason has been the Chief Chairman of the Board and CEO of Legg Mason since 1975. He has won numerous awards including Morningstar’s 2004 “CEO of the Year Award.”

James W. Hirschmann: (left)James Hirschmann was elected Chief Operating Officer in 2006. He was previously CEO of the subsidiary Western Asset and is the likely successor to Raymond Mason.

Bill Miller:Bill Miller is the Chairman and Chief Investments Officer of Legg Mason. He holds the record of managing the only mutual fund to ever outperform the S&P 500 for 15 years in a row. In addition, he won SmartMoney’s 2005 award as one of “The World’s Greatest Investors.”Charles Daley:Charles Daley was elected Chief Financial Officer in 2005, and Senior Vice President, Principal Financial Officer and Treasurer of Legg Mason in 2002. He is a certified public accountant and has served a variety of management roles since he first began at the

2004:

“Fixed Income Manager of the Year”

“Best Offshore Management Group” “Excellence in Fund Management Award “ (for Legg Mason Trust)

“Best Managed Company”

CEO Raymond Mason named “CEO of the Year”

Capital Managers Bill Miller and Michael Maubaussin part of the “Power 30”

2005:

Bill Miller one of “The World’s Greatest Investors”

Rated among “America’s Best Big Companies”

Ranked #2 in “World’s Best Money Managers”

2006:

Ranked 5th largest asset manager in the world

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Office Locations Worldwide

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Company History2

1889: George Mackubin & Co. (predecessor to Legg & Co.) was founded in Baltimore

1962: Mason & Co. was founded by Raymond A. Mason By Jan. 1967, had already become one of the three largest Virgina-based brokerage Firms

1970: Mason & Co. merged with Legg & Co. to form Legg-Mason Headquarters were moved to Baltimore

1975: Mr. Mason became Chairman of the Board and CEO in addition to his existing role as President

1982: Established the Legg-Mason fund Advisor to manage the company’s flagship fund, The Legg-Mason Value Trust

1983: Legg-Mason became publicly traded with total controlled assets of less than $30 Million

1986: Acquired Western Asset Management Company (manager of fixed income accounts for large institutions)

1996: Acquired Lehman Brothers Global Asset Management Ltd. (manager of international fixed income assets)

2001: Acquired Private Capital Management (high net worth manager) Acquired Royce and Associates (Small and micro-cap value mutual fund manager)

2005: Bill Miller outperform the S&P 500 for 15 straight years, making the only fund in

the world to do so Two strategic transactions with Citigroup and Permal which will make the firm a “Pure Play” global asset manager of equity/fixed income products

2 www.LeggMason.com

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2006: James Hirschmann III elected as Chief Operating Officer As of May 31, 2006, Legg-Mason holds $868 billion in assets under management

Competitive Landscape3

AG Edwards Inc.Ticker: AGE P/E: 15.37 Market Cap: $4.4 billionIncorporated in 1983, AG Edwards is a financial holding company headquartered in St. Louis, Missouri. It is divided into five major divisions: asset-management services, commission-based transactions, principal transactions, investment banking revenues and net interest revenue. The company deals primarily with individual clients spread across the United States by serving as a securities broker-dealer. The company offers a wide range of options, dealing with everything from mutual funds to investment banking, to selling life insurance.

BlackRock, Inc.Ticker: BLK P/E: 42.63 Market Cap: $9.2 billionBlackRock, Inc. is an investment management firm founded in 1998 and based out of New York City. It has both institutional and individual clients around the world, and offices in major cities such as Hong Kong, Tokyo and Edinburgh, Scotland. It deals with fixed income, cash management, equity and alternative investments and is currently managing $452.7 billion in assets. BlackRock is a majority owned subsidiary of The PNC Financial Services Group, which owns approximately 70% of the company. BlackRock also recently entered into an agreement with Merrill Lynch, in which it joined with the Merrill Lynch investment management division.

T. Rowe Price Group Inc.Ticker: TROW P/E: 25.15 Market Cap: $11.9 billion

3 www.reuters.com

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T. Rowe is a financial services holding company, providing advisory assistance to individual and institutional investors in the US and abroad. It was founded in 1937 by Thomas Rowe Price and is headquartered in Baltimore, Maryland. The company functions through smaller subsidiaries and manages in $269.5 billion in assets. 24% of these managed assets are comprised of various mutual funds including Equity Income, Mid-Cap Growth, Growth Stock, Blue Chip Growth and Small-Cap Stock. The company also offers administrative services such as accounting, recordkeeping, mutual fund transfer and shareholder services.

Ameriprise Financial Inc.Ticker: AMP P/E: 22.50 Market Cap: $12.26 billionAmeriprise Financial was founded in 1894 and has gone through multiple name changes before settling on Ameriprise in 2005. It is headquartered in Minneapolis, Minnesota and operates solely in the United States. Its activities include financial planning, asset management and providing insurance to individuals and institutions. It is divided into two major categories: Asset Accumulation/Income and Protection. The Asset Accumulation segment provides revenue through fees charged for financial planning and asset management services. The Protection segment brings in 56% of the company’s profits through insurance sales.

Charles Schwab Corp.Ticker: SCHW P/E: 24.97 Market Cap: $23.43 billionCharles Schwab was founded by Schwab in 1971 and based out of San Francisco, California. Operating through subsidiaries, it provides securities brokerage, banking and related financial services primarily within the United States. The company is divided into three major segments: Schwab Investor Services, Schwab Institutional and U.S. Trust. The Investor segment provides information on publicly traded companies and ratings on individual securities and functions as a trading platform for investors. The Institutional branch helps companies deal with client transactions while the U.S. trust division offers consulting for wealth management.

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SWOT Analysis

Strengths:Legg Mason is a well recognized company and one that has been

around for quite some time. It has consistently posted positive returns year after year and won numerous awards in fields ranging from best management to best international asset manager. It holds a well diversified portfolio which can service almost any client no matter what their needs may be. Offerings range from small-cap mutual funds for institutions, to customized plans for high-net-worth international clients. Every aspect of the company is related to asset management and helps Legg Mason set itself apart as truly specializing in this industry. Finally, the newly acquired Citigroup added “on the ground” investment professionals in as many as 140 countries around the world. These professionals live near the clients they serve, which makes them more effective and better able to communicate with the client quickly and easily.

Weaknesses:The biggest weakness and possibly most severe problem Legg

Mason has had to deal with since conception is the merger currently taking place with Citigroup. The two companies essentially swapped smaller parts of each to better help themselves specialize in one specific area of financial planning. The discrepancies that have arisen are based on valuations of each company as well as difficulty combining two separate corporate infrastructures. While it looks as though the merger will continue until through completion, there is no set time line for this end or a final cost projection. As a result,

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investors are slightly skittish and seem to be watching the company closely.

Opportunities:The greatest weakness of the company also lies in its greatest

opportunity for growth and expansion. Legg Mason doubled its assets in 2006 when it took over the International Asset Management division of Citigroup. This provided Legg Mason with investment professionals around the globe that could better serve their clients that are not in the US. Having a local professional that can both speak the language as well as be readily accessible is a huge benefit, and one that is likely to pay off for Legg Mason. The acquisition of Permal Group only helps build on the future prospects of the Citigroup acquisition. The major contribution of Permal Group was that of high-net-worth international clients. The two new additions work well with each other by not only adding new wealthy clientele, but also offering ways to better serve them.

Threats:Recent threats to Legg Mason lie in the newly filed class action

lawsuits. These lawsuits state that Legg Mason has been ineffective in merging with Citigroup and that it has taken more money and time than is necessary. In addition it cites Legg Mason as unable to properly combine the two corporate infrastructures. It remains to be seen what the result of these lawsuits will be, with no current predictions by analysts as to how long or costly they may be.

Porter’s Five Competitive Forces

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Institutional Ownership:

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Suppliers:Strong: other

smaller subsidiaries for

acquisition

New Entrants:Weak: Difficult to build up to

large cap

Buyers:Strong:

Increasing need for asset

management

Substitutes:Strong: Other

large-cap asset managers

Competitors:Strong: Other

financial institutions

Porter’s Five Competitive

Forces

As this model shows, the financial industry is a highly competitive one. There are many substitutes and threats and liquidity from one firm to another by the client is easy. Despite this however, several forces work in the industry’s favor with respect to the fact that there are more and more new investors coming into the market everyday. There is a growing demand for investment professionals and so far the industry has not been hurting for clients. It is difficult to work up to the large-cap market status and reputation that Legg Mason has received, so new entrants into this category are limited. In fact, any new entrants that pose a potential threat are typically bought up or made into subsidiaries by these larger firms. While there are many competitors in this business, there are also many buyers that are still making it

Analyst Recommendations

Financial Ratio Analysis

Profitability Ratios

Profitability Ratios LM Industry TROW AGE BLK

Operating Margin (ttm) 23.45 21.94 46.45 14.36 23.34Operating Margin 5-Yr Avg. 24.14 19.16 38.81 9.33 30.89

Pre-Tax Margin (ttm) 24.08 20.36 46.45 14.36 24.99

Pre-Tax Margin 5-Yr Avg. 24.06 19.01 38.81 9.33 33.99

Net Profit Margin (ttm) 14.66 14.66 28.75 9.32 15.82

Net Profit Margin 5-Yr Avg. 14.86 12.93 24.23 6.19 21.56

In terms of profitability, Legg Mason slightly outperforms the industry averages in every category. If we observe the trailing twelve-month figures compared to the five-year averages, Legg Mason has maintained consistent returns in each of its profit margins. Operating Margin has remained steady, as the company displays 23.45% return for the ttm compared to 24.14% for past five-years. Pre-Tax Margin is nearly identical over the two periods (24.08% ttm vs. 22.06% 5-Yr Avg.), while Net Profit Margin has decreased slightly (14.66% vs. 14.86%) due to an increased income tax rate. Comparing LM to its

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closest competitors, the company trails T Rowe Price substantially in every category (may be reflected in market valuation), trails Black Rock only slightly in the ttm period, and significantly outperforms AG Edwards in every category. Profitability Rating: Above Average

Management Efficiency

Management Efficiency LM Industry TROW AGE BLK

Return on Assets (ttm) 6.4 5.26 20.36 6.02 2.34Return on Assets 5-Yr Avg. 3.66 3.91 17.21 3.5 16.11Return on Investment (ttm) 9.55 10.63 23.85 9.05 2.65Return on Investment 5-Yr Avg. 8.55 8.52 19.6 5.45 22.45Return on Equiy (ttm) 12.37 21.2 23.85 14.02 3.94Return on Equity 5-Yr Avg. 13.14 15.84 20.53 8.91 23.81

Observing these ratios provides a glimpse into how effective management has been, with regard to certain profitability and turnover ratios. Over the trailing twelve-month period, LM has outperformed the Industry averages with regard to ROA (6.4% vs. 5.26%). The company is on par with industry averages for ROA during the past five years. Also, for the trailing twelve-months LM is slightly behind the industry average in both ROI and ROE figures. LM’s five-year average for ROI is slightly above industry average (8.55% vs. 8.52%), while ROE is slightly below industry average (13.14% vs. 15.84%). Compared to its peers, LM trails T Rowe Price in management efficiency, while it outperforms the returns of BlackRock and is nearly equal to the returns of AG Edwards.

Management Efficiency Rating: Average

Growth Rates

Growth Rates LM Industry TROW AGE BLK

Sales (ttm) v. 1 Yr Ago 117.48 44.2 18.82 9.28 43.29Sales 5Yr Growth Rate 11.48 7.12 5.6 -0.63 20.1EPS (ttm) v. 1 Yr Ago 34.7 37.03 19.06 39.74 7.83

EPS 5Yr Growth Rate 16.89 12.94 8.74 -2.23 20.93

Captial Spending (5YR) 17.45 -12.15 -9.56 -21.92 10.98

Comparing Sales growth for the trailing twelve-months to sales growth a year ago, LM has achieved an impressive 117.48% sales growth. This figure well eclipses the industry average of 44.2% growth during the same period. For the past five years, LM has experienced sales

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growth of 11.48%, which is substantially higher than the industry average of 7.12%. Perhaps the most impressive growth statistic, though, is Legg Mason’s 34.7% EPS growth rate for the past year. This number represents a substantial increase in Earnings Per Share, which the industry as a whole demonstrates. Over the past five years, EPS has grown at a 16.89% rate, eclipsing the 12.94% industry average. Finally, Legg Mason has increased capital spending 17.45% over the past five-years, while the industry on average has decreased capital spending by 12.15%. Growth Rating: Very Strong

Valuations

Year Price EPS P/ESales/Share

P/SBV/

ShareP/BV

CF/Share

P/CF

TTM $94.25$4.41

21.37

$20.304.64

$44.902.09

$4.65 20.26

2005 $119.05$2.56

46.50

$13.428.87

$19.596.07

$2.87 41.48

2004 $72.38$1.79

40.43

$10.117.16

$13.675.29

$1.95 37.18

2003 $50.42$1.77

28.49

$14.463.49

$11.384.43

$2.24 22.51

2002 $31.46$1.48

21.26

$15.132.08

$10.592.97

$1.95 16.13

2001 $32.12$1.53

20.99

$15.082.13

$9.113.53

$1.88 17.08

2000 $34.73$1.51

23.00

$14.142.46

$7.794.46

$1.84 18.87

Averages:

28.86

4.40

4.12

24.78

Price Performance:

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This chart shows Legg Mason’s historical performance as measured by several key valuation ratios. The large increase in most of the per share values for 2006 can be traced to the acquisition of Citigroup’s asset management business in December of 2005. It should be noted that the EPS represented above excludes extraordinary items, which if included would further raise earnings above $6.00 per share. Legg Mason is currently trading well below its historical average P/E of 28.86. We also conclude from the data above that LM was significantly overvalued in 2005 and 2004, but has since returned to a more reasonable price, especially considering its future growth prospects. The relationship between growth and valuation, as well as a comparison with peer companies, is shown below.

II. Peer Group Analysis

Company

Market Cap (billions)

P/E Forward P/E

PEG 2007 Earnings Growth

5 year proj. growth

P/S P/B P/CF

SCHW $23.9 25.28

23.6 1.60

17.2% 14.8%

4.0 5.2 23.9

AMP $12.6 22.84

14.35 1.48

12.1% 10.2%

1.6 1.6 19.9

TROW $12.1 25.46

24.65 1.80

17.7% 13.7%

7.1 5.3 25.3

BLK $9.3 42.7 28.4 1.8 34.8% 15.0 6.6 9.0 33.3

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6 9 %AGE $4.3 15.4

915.3 1.3

111.8% 11.7

%1.5 2.2 14.5

LM $13.31 21.37

21.3 1.44

20.1%

14.8%

4.64

2.1 20.26

Industry $48 29.3 20.90 1.57

18.3% 9.7% 2.47

5.8 26.80

LM’s P/E ratio compares favorably with most of the competitors listed above, with the exception of A.G. Edwards. Both LM’s projected 2007 earnings growth and projected 5 year growth are well above most of its peers. BlackRock, the only competitor with significantly higher expected growth, also trades at a much higher P/E multiple. LM also compares favorably with the Investment/Brokerage industry, with both a lower P/E multiple and a higher long term growth rate.

III. Price to Earnings Valuation

Pessimistic Most Likely Optimistic

EPS 4.17 4.39 4.61

P/EWeight

s0.3 0.5 0.2

Pessimistic 21.37 0.3 $8.02 $14.07 $5.91

Most Likely 25.12 0.5 $15.71 $27.57 $11.58

Optimistic 28.86 0.2 $7.22 $12.67 $5.32

Predicted Price: $108.07

P/E Valuation ExplanationFor the Price to Earnings valuation, we use the average analyst

earnings estimate for the year ending March 2007, with a value of +/- 5% for the pessimistic and optimistic values. To give a more conservative estimate, we use the average P/E ration for the last 7 years as the optimistic value, with the current P/E as the pessimistic ratio and the average of these two values as the most likely.

IV. Price to Sales Valuation

Pessimistic Most Likely Optimistic

SPS $27.58 $30.65 $33.72

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P/S Weights 0.3 0.5 0.2

Pessimistic 3.56 0.3 $8.83 $16.36 $7.20

Most Likely 4.00 0.5 $16.55 $30.65 $13.49

Optimistic 4.44 0.2 $7.35 $13.60 $5.99

Predicted Value: $120.02

P/S Valuation ExplanationOur price to sales valuation uses the sales projections from our pro

forma income statement, with a +/- 10% value for pessimistic and optimistic scenarios. For the P/S ratio, we use LM’s historical average of 4.4 for the optimistic scenario, with a -10% modification for the most likely value and a -20% modification pessimistic and optimistic values.

V. Price to Book Value Valuation

Pessimistic Most Likely OptimisticBV/

Share$ 44.90 $49.39 $53.88

P/BV Weights 0.3 0.5 0.2

Pessimistic 2.09 0.3 $8.44 $15.48 $6.76

Most Likely 3.11 0.5 $20.94 $38.40 $16.76

Optimistic 4.12 0.2 $11.09 $20.34 $8.88

Predicted Value: $147.09

P/B Valuation ExplanationThe price to book value valuation requires some adjustment, since

LM increased its book value per share by a large amount in 2006 due to an acquisition. Thus, a BV/Share growth rate including the 2006 number would be somewhat misleading. Using the average BV/Share growth rate from previous years, we found the optimistic value for the year ending March 2007. We used an unchanged BV/share for the pessimistic value, and the average of these two values for the most likely value. In the interests of conservatism, we used the historical average of P/BV for the optimistic scenario. LM’s current P/BV ratio is used for the pessimistic scenario, and the average of these two figures is used for the most likely scenario.

VI. Price to Cash Flow

Pessimistic Most Likely Optimistic

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CF/Share

$4.42 $4.65 $4.88

P/CF Weights 0.3 0.5 0.2

Pessimistic 20.26 0.3 $8.06 $14.13 $5.93

Most Likely 22.52 0.5 $14.93 $26.18 $10.99

Optimistic 24.78 0.2 $6.57 $11.52 $4.83

Predicted Value: $103.14

P/CF Valuation ExplanationLM’s cash flow per share increased by a large amount in 2006 due

to acquisitions; thus increases at a similar rate in the future are unlikely. We used LM’s current (TTM) Cash flow per share value as the most likely value, with values of +/- 5% making up the pessimistic and optimistic scenarios. LM’s historical average P/CF ratio is the optimistic value, with their current (TTM) ratio as the pessimistic value. The average of these two is the most likely value.

Pro Forma Income Statement

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3/31/2006 Forecast 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 % of Revenues

Sales Growth 60.12% 11.48% 11.48% 11.48% 11.48%

Total Revenues

Revenues $2,623 $4,200 $4,682 $5,220 $5,819 $6,487

Other Revenues $23 $29 $29 $29 $29 $29

Total Revenues $2,645 $4,229 $4,711 $5,249 $5,848 $6,516

Operating Expenses

Cost of Revenue $1,127 $2,136 $2,379 $2,651 $2,953 $3,291 50.50%

SG&A Expenses $702 $828 $923 $1,028 $1,146 $1,276 19.59%

Depreciation/Amortization $38 $60 $67 $75 $83 $93 1.42%

Other Operating Expenses $106 $231 $258 $287 $320 $356 5.47%

Total Operating Expenses $1,965 $3,255 $3,627 $4,040 $4,502 $5,016 76.98%

Operating Income $680 $974 $1,085 $1,208 $1,346 $1,500 23.02%

Non-Operating Income & Expenses

Interest Expense, Non-Op. -$58 -$162 -$180 -$201 -$224 -$250 -3.83%

Interest/Investments $48 $66 $73 $81 $91 $101 1.55%

Other, Net $40 $41 $46 $51 $57 $64 0.98%

Income Before Tax $715 $919 $1,023 $1,140 $1,270 $1,415 21.72%

Income Taxes $276 $355 $395 $440 $490 $546 38.60%

Income After Taxes $440 $564 $628 $700 $780 $869 13.33%

Diluted Weighted Avg. Shares 130 137 143 151 158 166

Earnings Per Share $3.38 $4.13 $4.38 $4.64 $4.93 $5.22

Legg Mason Inc.

Pro Forma Income Statement

Five-Year Forecast

(in millions)

Sales Projections

Sales growth for Legg Mason has increased at a rate of 117% over the trialing twelve-month period, but this rate is not expected to continue throughout the third and fourth quarters of the fiscal 2007 year. Instead, for the 2007 revenues forecast we took into account Q1 and Q2 figures, and ultimately decided to use the average analyst opinion given by Yahoo Finance of $4.3 Billion. This reflects a 60.12% rate of growth overall for the year. After this period, we expect revenues to settle into rates similar to the historic five-year averages. Therefore, for years 2008-2011 we used the historic five-year growth rate of 11.48% for each year. Forecasted Data

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In order to calculate operating and non-operating expenses and income, we project data at five-year average rates reflecting percentage of revenues. Each of these percentages is figured by taking the five-year cumulative total for that given category, and then dividing by the five-year cumulative revenues to reach average percentage of revenues. Operating expenses historically total 76.85% of annual revenues, which leaves operating income at 23.02% of revenues. Non-operating income and expenses total a negative 1.3% of sales, lowering income before tax to 21.72% of revenues. Income taxes currently stand at 38.6% of net income.

Common Shares Outstanding

Over the past five years, number of shares outstanding has increased at a rate of 5.05% per year. This 5.05% annual increase is applied to calculate diluted weighted average shares for each year. Finally, earnings per share estimates are figured by dividing income after taxes by the amount of shares outstanding. These estimates are fairly conservative, as projected EPS are well below analyst projections of $4.39 EPS for 2007 and $5.23 EPS for 2008.

 

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