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Leggett & Platt

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Investors seeking a safe haven in this sluggish economy will find Leggett & Platt Incorporated (LEG - Free Report) to be an attractive investment opportunity. This diversified engineered products and components manufacturer is a Zacks #2 Rank (Buy), pays a dividend that yields a solid 4.8% and has delivered an average positive earnings surprise of 7.4% over the last 10 quarters.

Earnings momentum has been moving upward in the past week for LEG since it reported impressive second-quarter results, which included year-over-year EPS growth of 11.4%, a positive earnings surprise of 8.3% and an upbeat guidance.

Profit Surges, Guidance Up

On July 26, Leggett & Platt declared second-quarter 2012 earnings per share of 39 cents, topping the Zacks Consensus Estimate of 36 cents and the year-ago earnings of 35 cents.

Total sales of $938.8 million fell short of the Zacks Consensus Estimate at $979 million and dipped marginally from $945.2 million a year ago, due to a 2% decline in same location sales. Gross profit grew 2.9% to $187.2 million, while gross margin expanded 70 basis points to 19.9%. Operating income rose 9% to $86.2 million, whereas operating margin improved 80 basis points to 9.2%.

Buoyed by better-than-expected bottom-line results, management raised its 2012 guidance to between $1.35 and $1.50 per share on projected sales between $3.65 billion and $3.8 billion. Earlier, the company had forecasted between $1.25 and $1.45 per share.

Earnings Momentum Moving Upward

This Zacks #2 Rank (Buy) stock has been witnessing upward estimate revisions over the past 7 days. The Zacks Consensus Estimate for 2012 rose 6.1% to $1.39 per share on upward revisions from 5 of 6 estimates. The current estimate implies year-over-year growth of 24.6%.

The Zacks Consensus Estimate for 2013 is up 3.2% to $1.62 per share, also on upward revisions from 5 of 6 estimates. The current estimate suggests year-over-year growth of 16%.

Dividend Portraying Strength

Leggett & Platt has been consistently raising its dividend since initiating the payment in 1987. The current quarterly payout, which stands at 28 cents, represents an annual yield of 4.8%. Leggett & Platt’s commitment towards enhancing shareholder return reflects its free cash flow generating capability, sound liquidity position and defined future prospects.

Valuation Looks Reasonable

Leggett & Platt currently trades at a forward P/E of 16.7x, reflecting a 3.3% discount to the peer group average of 17.2x. However, on a price-to-book basis, shares trade at 2.4x, a substantial premium to the peer group average of 1.1x. Given the long-term earnings growth projection of 15%, the PEG ratio comes in at 1.1, marginally above the benchmark of 1 for a fairly priced stock. The return on equity (ROE) looks impressive. It has a trailing 12-month ROE of 13.3%, which is ahead of its peer group average of 11.6%.

A Look at the Chart

A quick look at the price and consensus chart reveals that the stock price line remains below the 2012 and 2013 earnings estimate lines, reflecting that the stock is still undervalued.

Leggett & Platt has a well-diversified customer base and solid research and development capabilities, which provide a competitive edge and strengthen its pricing power in the market. With a low fixed cost base, spare production capacity and healthy operating cash flow generating capability, the company remains well positioned to grab opportunity when the economy revives. The company faces competition from Flexsteel Industries Inc. (FLXS) and Genuine Parts Company (GPC).

Founded in 1883 and headquartered in Carthage, Missouri, Leggett & Platt is a global manufacturer that conceives, designs and produces a broad variety of engineered components and products found in homes, offices, retail stores and automobiles. The company’s most important product line includes components for residential furniture and bedding, retail store fixtures and point of purchase displays, and components for office furniture. It has a market cap of $3.26 billion.

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