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Investment idea - Legget&Platt (LEG)

Legget&Platt is a manufacturer operating in four segments: Residential Furnishing (supplying of components for finished bedding and furniture), Commercial Fixturing & Components (producing if a broad suit of retail store fixtures and point-of-purchase displays for many retailers as well as components and engineered systems for office furniture manufacturers), Industrial Materials (their own steel and rod mill produces the steel used in wire products), Specialized Products (products from vehicle seats to wireless charging system). The Company is a leading U.S. Manufacturer of its core products such as Components for bedding and residential furniture, Components for office furniture, Drawn steel wire, Auto seat support and lumbar systems etc. Key competitive advantages for L&T include High product quality, warranty service, JIT delivery, attention to customer service, minimizing customers’ cost of inventory management, logistics, freight, tariffs, currency fluctuations, working capital requirements, Vertical integration in steel and wire; large scale purchasing of RM’s.

The Company’s targets look attractive: 50-60% dividend payout, EBIT margin improvement to 9,7% for 2013 compared to 9,3% for 2012. Strategic goal is top third of S&P 500 in Total Shareholder Return by divesting low performing business, improving margins & returns on assets, long-term annual revenue growth at 4-5%. L&T has a 42 year history of dividend increases; Operating Cash has exceeded Dividends & Capital Expenditures for last 20 years. Dividend for the 3d quarter 2013 will be also raised by 3,4% to $0,3 per share, indicated dividend yield is 3,9% based upon Sept,19 closing price. The dividend will be paid on Oct, 15 to shareholders of record on Sept 13, 2013.

As for the 2Q2013 financial results, the Company increased its sales revenue by 2,6% y/y to $959mn, expenses were growing slower. Thus, EBIT for the 2q2013 increased by 13,5% to $98,5mn, while EBIT margin amounted to 10,3% compared with the 2q2012. Net income for the quarter grew by 9,9% to $71,3mn.

Consensus target price is $33, upside risk – 7%, short-term goal - $32.