Today is Tuesday, April 30, 2019 and here’s your daily small cap valuation.
Legg Mason (NYSE: LM) is a small-cap stock that could have a lot of potential. But it’s hard to value smaller companies like this. Conventional valuation metrics like price-to-earnings (P/E) ratio, profit margin, and return on equity (ROE) may not be available for them.
To get a sense of Legg Mason’s true valuation, let’s compare it to its industry peers — and to itself one year ago. We’ll look at four small cap valuation metrics…
Price-to-Book Value (P/B) Ratio
Legg Mason’s price-to-book value (P/B) ratio of 0.7912 is 51.61% lower than its industry average of 1.635. That’s good. A low P/B ratio indicates that the company has a solid balance sheet — and that based on its balance sheet, the stock is trading for unusually cheap.
Free Cash Flow Yield (FCF/Enterprise Value)
Legg Mason’s free cash flow yield (FCF/EV) of 15.58% is 190.13% higher than its industry average of 5.37%. That’s good. This metric compares free cash flow (the amount of cash left over after all expenses and capital expenditures have been paid) with enterprise value (a comprehensive alternative to market cap that includes cash and debt).
A high free cash flow yield indicates that a company is performing efficiently — and that it’s in a good position to repay any debt on its books.
Earnings per Share (EPS) Growth
Legg Mason has not grown its earnings per share (EPS) in the last year. That’s not good. Negative earnings aren’t the end of the world — they’re fairly common among smaller, newer companies — but if earnings are falling over time, that’s definitely a bad sign.
Gross Margin Growth
Legg Mason has grown its gross margin by 2.28% in the last year. That’s good. Many young small caps are unprofitable, so net profit margin isn’t always a useful measure. But a growing gross margin means that the company’s operations are getting more and more profitable over time.
Legg Mason scored favorably on 3 of our 4 valuation metrics. With this in mind, we believe the stock is slightly undervalued.
We’ve been keeping an eye on a set of small-cap stocks that are a better value than Legg Mason. These stocks have the potential for bigger gains — and they’re far less risky than the speculative small caps many investors gamble on. Enter your email below to learn more.
P.S. Got another small-cap stock you want us to test with our valuation metrics? Leave the ticker symbol in the comments below.