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April 18, 2008
A Stable Leg For Unstable Times

Leggett & Platt has generated positive free cash flows on an annualized basis during each of the last 40+ years. This impressive historical streak, which spans 6-recessions, is proof that the company has a lasting competitive advantage in the marketplace. 

Investor’s were reminded of this unique trait yesterday, or when the company confirmed that free cash is expected to keep rolling in despite softness in the U.S. economy. Seemingly overjoyed that 1Q08 did not turn out to be a disaster, investors bid LEG shares higher by more than 14% - or only the second time in the last 20-years that shares have launched higher by this amount in a single session.


Whether or not Leggett & Platt shares priced at $14.12 on April 17, 2008 represent an absolute bottom in the stock is not the issue at play. Rather, what direction the company is moving and whether or not its historical record of free cash generation and dividend increases can be maintained regardless of what the U.S. economy does is. On this front the company offered reassurances during its conference call yesterday.  Consider the following:

- In the near term the company projects $300 million in annualized capital expenditures and dividends.

- The company expects cash from operations to ‘routinely exceed these requirements’.

Recognizing that the combination of a depressed share price, corporate stability, and increasing operating efficiencies are an attractive mix during challenging economic and stock market times, Raymond James & Associates analyst, Budd Bugatch, raised his rating on LEG yesterday:

“While still in its early stages, Leggett's strategic makeover will almost certainly bear fruit”

What is worth adding to this dose of analyst optimism is that if proposed asset sales go flop and/or the economic/raw materials landscape continues to produce more clouds, LEG shares will ‘almost certainly’ suffer.  To be sure, with Wall Street entranced by the EPS game disappointment could be only a penny or two away (i.e. if the asset sales do not go according to plan LEG’s share repurchases would not go according to plan and the company’s EPS forecasts would not be met because of the higher than expected share count).

These possibilities noted, the company’s historical free cash flows record, attractive dividend yield, and clean and healthy balance sheet still represent a solid ‘turnaround’ investment. The possibility, however remote, of a dividend reduction in the coming 12-months was greatly reduced yesterday.

Writing out of the money covered calls on further share price strength to maximize returns remains an option worth considering, although the Wish List does not monitor/track these returns.


Disclosure: Brady Willett and Todd Alway own shares in LEG.

 

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