Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how Leggett & Platt fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Leggett & Platt, Incorporated is an international manufacturer that conceives, designs and produces a range of engineered components and products found in many homes, offices, retail stores, automobiles and commercial aircraft. The Company’s operations are organized into 20 business units, which are divided into 10 groups under its four segments: Residential Furnishings; Commercial Fixturing & Components; Industrial Materials, and Specialized Products. On January 12, 2012, the Company completed the acquisition of Western Pneumatic Tube Holding, LLC. In Leggett & Platt Inc acquired Specitubes SAS from PFW Aerospace AG.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$18.71|
|Value Based on 0% Growth||$10.97|
|Market Implied Growth Rate||8.10%|
|Net Current Asset Value (NCAV)||-$3.12|
Balance Sheet – 12/31/2013
Earnings Per Share
Earnings Per Share – ModernGraham
Leggett & Platt Inc. is an interesting company that is not suitable for Defensive Investors due to the insufficient earnings growth over the ten year period, the low current ratio, and the high PEmg and PB ratios. Â However, the company does qualify for the Enterprising Investor, though it should be noted that the current ratio is very close to the minimum for that investor as well. Â Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company as well as other opportunities, including a review of 5 Low PEmg Companies for the Enterprising Investor and a Glance at the Dow. Â From a valuation perspective, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $0.80 in 2009 to $1.29 for 2013. Â This demonstrated level of growth supports the market’s implied estimate of 8.1% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls within a margin of safety in relation to the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Leggett & Platt (LEG)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
If you like our valuations, why not check outÂ ModernGraham Stocks & Screens? Â It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!
Disclaimer: Â The author did not hold a position in Leggett & Platt (LEG) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from the Wikipedia; this article is not affiliated with the company in any manner.