Leggett & Platt LEG
October 22, 2007 - 10:46am EST by
surf1680
2007 2008
Price: 18.68 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 3,100 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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  • Strategy Change
  • Buybacks
  • Strong Balance Sheet

Description

Leggett & Platt is a 100+ year old company that is part of the S&P500. I am submitting it because it (1) meets important value investment screening criteria; 3 years of investor exhaustion, strong balance sheet, free cash flow, and boring, non-glamorous conglomerate involved in a bunch of out-of-favor manufacturing industries, (2) has incentivized management that wants to turn the company around, (3) is in the process of a strategic review, (restructuring, selling off, scaling down portfolio of businesses), (4) the capital structure is changing.  The amount of shares outstanding is already declining nicely, and (5) pays a 3.9% dividend.
 
 
Point#1: value screen
 
LEG investors have experienced significant investor exhaustion & disappointment.  Breaking the hearts of investors for 3 years is statistically a good place to start for finding stocks that yield excessive returns.  LEG’s stock price peaked at $30.68 at the end of 2004 so LEG turns in 3 years of solid exhaustion and disappointment this December.   Even with dividends, investors who purchased LEG the last few years are likely disappointed especially since the rest of the broad market has posted nice gains.   
 
A steady stream of negative “macro” news related to housing hasn’t helped.   LEG fits the description of non-glamorous, hard to understand, boring, hated, out-of-favor, ugly, etc.,  The corporate description “Leggett & Platt, Incorporated engages in the design and production of a range of engineered components and products worldwide. It operates in five segments: Residential Furnishings, Commercial Fixturing & Components, Aluminum Products, Industrial Materials, and Specialized Products. Residential Furnishings segment offers bedding products, furniture and consumer products, and fabric, foam, and fiber to manufacturers of finished bedding products and upholstered furniture, as well as to retailers and distributors. Commercial Fixturing & Components segment provides fixture and display products, and office furniture components to retail chains and specialty shops; brand name marketers and manufacturers, food service companies, healthcare providers, and restaurants; and office, institutional, and commercial furniture manufacturers. Aluminum Products segment produces non-automotive aluminum die castings, and zinc and magnesium die castings, as well as new and refurbished dies for various types and sizes of die casting machines. Its customers include small engine and diesel engine builders; manufacturers of outdoor lighting fixtures, cable line amplifiers, wireless communications systems, and other cable and telecommunication products; gas barbeque grill manufacturers; and consumer appliance and power tool manufacturers. Industrial Materials segment produces steel rod, drawn wire, and welded steel tubing, as well as specialty wire products and fabricated tube components. Specialized Products segment supplies lumbar systems and wire components for automotive seating manufacturers; designs, produces, and sells van interiors, including the racks, shelving, and cabinets installed in service vans; and truck bodies for cargo vans, flatbed trucks, service trucks, and dump trucks. This segment also designs and produces machinery for bedding manufacturers. Leggett & Platt was founded in 1883 and is headquartered in Carthage, Missouri.”
 
Balance Sheet:   The reported book value per share is $13.25 and goodwill makes up nearly $8 of that.  My premise for arguing that LEG has value in the balance sheet is not based on insight into the actual assets.  The 10k says there are 300+ manufacturing locations spread through 33 states and 24 foreign countries.  I don’t have the resources to appraise them.  I’m guessing the PPE are worth much more than the balance sheet says because (1) this is a 100+ year old company that owns real estate acquired at lower prices, often at firesale prices, (2) it’s a manufacturing type company with low tech physical assets, and (3) management is aggressive writing down assets.  If management buys a machine for $100 and depreciates it $50/year then management is saying it thinks that machine has a life of 2 years.  If you make the daring assumption that normalized ongoing capex over an extended period, divided by normalized ongoing depreciation, is equivalent to the average life of all the assets in general, then managements is basically saying their average asset lasts less than 2 years.  This is low tech stuff, assume the average life is 4 years and reconstruct the pp&e based on that…  the resulting net tangible asset value would go to 19.25/share.  I realize these assumptions are a stretch given that the 10k says ppe as a whole is depreciated at rates varying from 3 to 33% but the following is the actual history of depreciation relative to capex.  Given the way it looks, depreciation appears to be on the high side of that range.  (Further confirmation of this theory is that recent divestures have resulted in taxable gains)
 
year
capex
depreciation
depreciation as % of capex
 
 
 
 
1988
36.3
21.65
60%
1989
28.7
25.67
89%
1990
42.7
30.2
71%
1991
33.4
36.4
109%
1992
33.2
38.2
115%
1993
54.2
39.1
72%
1994
88.5
48.8
55%
1995
93.9
58
62%
1996
96.2
75.8
79%
1997
119.4
88.3
74%
1998
147.6
106.1
72%
1999
159.1
120.5
76%
2000
169.7
139.2
82%
2001
128
156.7
122%
2002
124
154.4
125%
2003
136.6
158.6
116%
2004
157.1
166.7
106%
2005
164.2
160.8
98%
2006
166.3
156.6
94%
 
Trailing free cash flow yield is 10% because of asset sales.  Strong free cash flow is likely to continue because of (1) continued divestures and (2) management believes balance sheet is under leveraged.
 
Ratios are at the bottom of their respective ranges and compare favorably to comps (as of Friday’s close)
 
 
P/E
P/S
P/B
Yield
Bassett
na
0.6
0.6
7.6
Flexsteel
9.8
0.6
0.9
3.5
Haverty
27.6
0.4
0.7
3.3
La-Z-Boy
34.7
0.6
0.8
6.9
Stanley
29.0
0.5
1.5
2.9
 
 
 
 
 
Carlisle
15.8
1.0
2.5
1.3
Cooper
16.5
1.8
3.5
1.6
Danaher
21.7
2.4
3.1
0.1
Dover
15.8
1.4
2.5
1.7
Eaton
14.7
1.1
2.9
1.9
Emerson
20.0
1.8
4.6
2.1
Illinois
17.2
2.0
3.3
2.0
Ingersoll Rand
18.5
1.6
2.5
1.5
Masco
23.5
0.7
2.0
4.1
Pentair
18.8
1.0
1.8
1.8
PPG
15.8
1.1
3.3
2.8
 
 
 
 
 
LEG 7 year average
18.1
0.9
2.1
2.4
LEG Current
12.9
0.6
1.4
3.9
LEG Forward
12.7
 
 
 
 
 
 
 
 
LEG historical hi
26.0
1.3
2.8
3.5
LEG historical low
10.7
0.7
1.6
1.8
 
A larger portion of LEG revenue comes from residential & home furnishing sales (1st  group of comps) but management uses the 2nd group of comps (diversified manufacturing) in their def14a.
 
 
Point #2 Incentivized Management
 
LEG has got a complicated compensation policy.  Raymond James did a report on it in 2006 and it is posted on the LEG website.  RJ views it overall as favorable.   A portion of top executive compensation consists of stock & options and they have as much to gain as shareholders by the making the share price go up.  Their bonus plan has different levels of participation & benefits for different levels of executives but they all require a lot of Form 4 activity. 
 
Some observations from Form 4 filings:
 
-Small, bimonthly share purchases for which they file a Form 4 have been ongoing for several years
 
-The chairman & ex-ceo, Felix Wright, has been purchasing slightly larger amounts of shares (500-2000 shares) on a regular basis for several years
 
-In mid-2006, Felix Wright stepped up his purchases and bought some larger lots (10k plus)
 
-For several years, insiders have routinely sold large lots (10k plus shares) back to the company at market prices.
 
-These same routine insider sales back to the company have ceased as of June 2007.  No one has sold shares under $23.
 
-The CFO, Mattew Flannigan, bought an abnormally large amount of shares (11,662 vs. the normal 100-200) in August.  In the previous years, he would normally be a seller as new stock/options are awarded.
 
Insider ownership:
Director/Exec:
# of shares beneficially owned
%
David Haffner, CEO
                                 1,855,365
1.09%
Mattew Flanigan, CFO
                                   235,431
0.14%
Karl Glassman, COO
                                   480,884
0.28%
Felix Wright, Chairman
                                 3,634,288
2.13%
Raymond Bentele
                                     38,352
0.02%
Ralph W. Clark
                                     27,147
0.02%
Harry M. Cornell, Jr
                                 4,998,734
2.92%
Robert Enloe
                                     53,822
0.03%
Richard Fisher
                                   133,082
0.08%
Paul Hauser
                                     98,573
0.06%
Joseph McClanathan
                                       4,268
0.00%
Judy Odom
                                     21,378
0.01%
Maurice Purnell
                                     51,266
0.03%
Phoebe Wood
                                       6,946
0.00%
 
 
Point #3 In Process of Strategic Review
 
They have gone from a “tactical” review to a “strategic” review.  I don’t know what these words mean exactly.  Investors are in wait-and-see mode.  The tactical review has resulted in some asset sales (closed or sold 36 underutilized or underperforming facilities) and a substantial share buyback.  Management is not happy with progress and promises to take bigger steps.  So, they are moving up to a “strategic” level review which could mean they’re going to cut deeper.  They hired an external company to tell them what to do.  The results of the “strategic” study are going to be announced at an analyst day conference in New York City on November 13 (it will be webcast). 
 
 
Point #4 Buybacks
 
Purchased 9.4 million of an ongoing 10 million share buyback program. 
 
YEAR
SHARES OUTSTANDING:
1998
200.7
1999
200.9
2000
200.4
2001
200.4
2002
199.8
2003
197.0
2004
196.9
2005
193.6
2006
186.8
current
177.1
 
 
Point #5 Yield
 
Current yield is 3.9%.  LEG has a long, growing dividend history. 
 
YEAR
DIVIDEND
1967
0.01
1968
0.01
1969
0.01
1970
0.01
1971
0.01
1972
0.01
1973
0.01
1974
0.01
1975
0.01
1976
0.01
1977
0.01
1978
0.01
1979
0.02
1980
0.02
1981
0.03
1982
0.03
1983
0.03
1984
0.04
1985
0.04
1986
0.05
1987
0.07
1988
0.08
1989
0.09
1990
0.11
1991
0.11
1992
0.12
1993
0.14
1994
0.16
1995
0.19
1996
0.23
1997
0.27
1998
0.32
1999
0.36
2000
0.42
2001
0.48
2002
0.50
2003
0.54
2004
0.58
2005
0.63
2006
0.67
 
 
In summary:
 
(1)  This write-up highlights “value” aspects, sellside reports fill in many details & company history.  Some sellside reports are on the LEG website.
(2)  The soon to be released strategic review and potential resulting spinoffs could be fertile ground for more value ideas… it might pay to get familiar with the company now even if you don’t buy.
(3)  I realize the stock is in a free fall.  I am (ahem…) advocating scaling into a position over time.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Catalyst

Catalysts:

-continued buybacks
-dividend
-November 13th announcement of the results of strategic review
-more divestures
-acquisition related growth opportunities increase as private equity boom fades
-U.S. manufacturing outlook improves as dollar weakens
-populist trade barriers go into effect limiting foreign competition of core products
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