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Jim Asks For Change

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October 06, 2007 – Comments (0)

I admit it…my favorite companies have always been companies that can do more than one thing. What I mean by that is that they are diversified in their revenue stream enough so that if revenue from one source slows, revenue from another source would still be strong enough to sustain the company.

Now What?

Take Southwest Airlines Company, Inc. (NYSE: LUV) for instance. Like it or not they are in the airline business. Certainly there are other things that they do which produce revenue, but their main revenue stream is from hauling the flying public from spot to spot.

3M Company, Inc. (NYSE: MMM) is an example of a company that I think is well diversified. They are a global company that does a helluva lot more than just make tape. I would add another line about the company, but there simply isn't enough space. If you want to learn more, and I admit that I own shares of company stock, just visit the company's website. You're gonna be amazed.

Show Me Yours

While certainly not as diversified as 3M, Leggett and Platt, Inc. (NYSE: LEG) also has several revenue streams.

Incorporated in 1901, the company is a diversified manufacturer of various products. From the company’s website:

Leggett & Platt is a diversified manufacturer that conceives, designs, and produces a broad variety of engineered components and products for customers worldwide. While Leggett & Platt may not be a familiar name to you, chances are you sleep on a bed made with Leggett components - box spring, innerspring, foam and fiber; relax in a recliner that has an L&P motion mechanism powering it; shop in stores that have products displayed on shelving made by L&P; barbeque on a grill that's made up of Leggett cast aluminum - in short, Leggett products are all around you, making the products you use every day more comfortable, durable and life-enhancing.

It's Throbbing

Residential Furnishings which manufacturers bedding and home furniture components, Foam, Fiber, Non-Fashion Construction Fabrics, Ornamental Beds, Steel Bedding Supports, Coated Fabrics, Adjustable Beds, and Lumber.

Commercial Fixturing and Components which manufacturers Retail Fixtures, Point of Sale Fixtures,Storage and Materials Handling Systems, Office Furniture Components, and Plastics.

Aluminum Products, manufacturing Aluminum, Magnesium, and Zinc die castings.

Industrial Materials which produces Steel Wire, Welded Steel Tubing, and Bale Ties and Components.

Specialized Products which makes Automotive Seat Suspension Systems, Lumbar, Power Train and Control Cable Systems, Machinery Wire for Forming, Quilting and Automation, and Super Wide Format Digital Printers.

Wow It's Getting Bigger

The company recently increased its quarterly dividend from $0.17 to $0.18, a fact that sort of made me yawn. What got my attention however was that this was dividend increase number 36. Yep, the company has increased the annual dividend every year for the past 36 years. Not too shabby.

Showing You Mine

Based on the company’s 10-K filing of 12/06, I have the company on my watch list with a Reasonable Value Estimate of $46, a buy target of $23, a first sell target of $45, and a close target of $49.

The stock closed on 10.04.07 at $19.85 with first resistance at $20.11, second resistance at $22.63, and support at $18.75, which means from current pricing levels the stock has an upside of between 2% and 14%, and downside of about 5%.

Sorta Small, Huh?

I went back and looked at historical pricing and it seems to me that the price of the stock has been steadily decreasing over the past three years, with a high during that period of around $28 and a low of just under $18; not exactly impressive.

From my watch list, the company has a Return on Invested Capital of 19%, Free Cash Flow of $2.43, and a Tangible Book of $5.45, debt per share of $5.95, cash per share of $0.71, and no marketable securities.

Hey Look, It Wiggles

What I don’t like about the company is the amount of debt it carries, about $1.1 billion. I realize the company operates in businesses that require large amounts of capital, I got that.

But I also believe that the mark of a well integrated management team, a management team that is involved in every aspect of the company, a management team that is keeping an eye on today while focusing on tomorrow, would have a definitive plan to reduce the company’s exposure to debt, given future economic trends.

In other words increases and decreases in the amount of debt a company carries on its books should fluctuate based on what management believes future economic conditions will be. As I looked at the company, I just didn't get a sense that management was that in touch with economic events.

To be fair, in fiscal 2005, Leggett and Platt did reduce long-term debt by $433 million and in fiscal 2006 the company again reduced long-term debt by another $114 million. But during those same two years the company added debt, so at the end of the day the debt decrease of $547 million actually became a debt decrease of only $114 million, which leaves the current debt levels at $1.1 billion; $52 million of short-term debt and $1.06 billion of long-term debt.

Can I Touch It?

The question now becomes what to do with this stock? On one hand it has an excellent reasonable value estimate and a current price to buy ratio of 0.86, which means current pricing levels are 16% below my buy target. And yet, I just can't help but think there is a big shoe out there about to drop.

So for me, I’m going to pass. The stock price has been slowly declining for the last three years, and I just don’t see that trend changing anytime soon. As I pointed out, based on my numbers the company is trading well below my reasonable value estimate and on my watch list it’s rated a buy.

One More Rub

But all that's on paper, and the paper that matters most, at least to me, is the kind I can fold up and put in my pocket. I’ve grown rather fond of pictures of past presidents, and keeping them in my front pocket right next to my crotch gives me a certain…satisfaction.

Wax

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