hi I'm Jimmy in this video we're looking at Leggett and Platt ticker symbol LEG
this video is part of our dividend aristocrat series where we're analyzing
each of a company within the dividend of aristocrats ETF with the goal of seeing
if we can identify the top dividend aristocrat stocks that ultimately have a
good chance of paying us a reliable dividend over the next few years and get
us closer to our goal of financial freedom
okay so first I'm gonna dive into Leggett and Platt's business and then
we'll see if we can come up with the fair value of LEG stock using both the
dividend discount model and a discounted free cash flow model
okay so let's dive into Leggett and Platt's business first this is their
business broken out by the revenue in 2018 according to their segments okay
simple enough they seem fairly well diversified but let's look a bit closer
in each segment to see we can find out about them so the largest segment is
residential products what they do is they supply the machines and the parts
used by betting manufacturers so that the betting manufacturers can produce
the products that they create and ultimately sell to the public we can see
that this segments revenue history has been somewhat stagnant over the past ten
years now this is a little bit deceiving at first glance because in 2016 the home
furniture part of this business segment well then management reassigned that
going into leaving 2016 going into 2017 they reassigned that to the second
largest segment which is furniture products that becomes much more obvious
when we look at the furniture products revenue chart and clearly the switching
segments it's much easier to see in a segment that had smaller revenue now one
of the reasons I like to I like to look at the businesses segments in general is
that I like to look at the history of revenue if the company provides it and
hopefully we can come across where the opportunities or perhaps where the
threats are to the business by looking at this type of thing we can identify
where the growth is or where the weakness is and then see what we can
forecast from that particular business line I only came across this particular
segment change because when I looked at these numbers
well this change in this particular chart really
jumped out at me that's really unusual something must have happened here it
could have been an acquisition or maybe they this Leggett and Platt got a big
new customer or something along those lines in this case it was really just a
shift internally but that's good information a half now if you're curious
once I saw this big jump in revenue I went straight back to the 2017 in your
report for a leg and Platt and I wanted to see what management was saying about
this they almost certainly had to address what was happening here now I
only bring this out because I'm hoping whenever I'm doing my research I'm
hoping to try to remain aware of potential red flags or strange things
happening like an enormous jump in revenue or enormous decrease in revenue
so if we ever see a huge drop or a huge jump in revenue I don't think we should
just accept that let's look and try to understand why it's happened now this is
important because this jump here although they didn't jump as much as
this chart appears they did have internal growth of about six percent so
it's good to know that they are in fact growing and I actually think that this
division and the division before well they're both two of the brighter points
for leg and plant going forward a lot of analysts are expecting for 2020 to be a
solid year for them so that's a good thing from an overall growth perspective
okay next up we have the specialized product segment and as we could see this
is a real growth point it has been for the past few years now this division
what they do is they supply a whole ton of products to the automotive industry
they make seat suspensions lumbar support system they make parts for the
aerospace and the construction industry they do a lot of different things mostly
around seating but overall we can see that their growth is looking quite good
then we shift to their small segment this is the industrial product segment
and here we can see that overall they've been struggling and what they do is they
produce steel rods and drawn steel wires and this industry has struggled there's
been deflation in the steel market and that's become a products become a
problem for them in a very commodity type of business of business where
they're competing mostly on price so this is not a very high margin business
line for them so overall when we switch over to their
overall revenue we could see that they've done a decent job and I actually
expect them to do fairly well in the next couple years since some other
higher-end products seem to be doing better compared to the steel business
that they're in okay now let's see if we can come up with a fair value for LEG
stock so the first valuation method is called
the dividend discount model now I've got a link in the description below on how
to do this exact formula it's a fairly simple calculation but for the sake of
this video basically with our required rate of return which I'm using eight and
a half percent that would imply that the fair value of Leggett and Platt stock is
about forty-five dollars per share right now le Jie is trading about 50 or 51
dollars per share so with this valuation method it seems that LEG stock seems a
bit overpriced but what about when we switched to the discounted free cash
flow valuation method once again I get a link in the description below walking us
through how to do this whole thing in fact I created an Excel template if
you're interested you can find a link in the description below walk you through
how to do this whole thing but to summarize for this video
well I found these analyst estimates and though there are the free cash flow
analyst estimates going out the next few years then I used a required rate of
return of eight and a half percent that's the same required rate of return
I used in the last valuation method the dividend discount model then I used a
perpetual growth rate of two and a half percent that is how much we expect for
their free cash flow to grow forever in perpetuity this gives us a fair value of
the company then we divide that by the shares outstanding and that gives us a
total fair value of about 52 dollars per share
now this fair value estimate is about a dollar higher than the current stock
price so overall it seems that Leggett and Platt stock is about in line with
our calculation of fair value slightly above it he oh those card stock by
slightly below this one slightly above the dividend discount model so although
I like this business I do want to see the stock pull back before we get
involved in now in this whole series were going through all the companies in
the dividend aristocrat ETF so we expect these companies to have good dividends
good dividend history and ideally we expect them all to be covered a lot like
Leggett and plaids dividend history we expect
profits to cover the dividends that they're paying out now we actually did a
similar series on this channel where we analyzed all the companies in the Dow
Jones Industrial Average and then we created three different portfolios a
value a growth and a dividend portfolio using nothing but the companies that we
analyzed on this channel now I think it makes sense to see if we could take five
or ten companies from the entire dividend aristocrats ETF and see if we
can add those companies to our dividend portfolio and try to see if we can make
sort of evolve that portfolio to be even stronger if you're curious to see what
our dividend portfolio look like from our dial thirty analysis that could be a
good next video for you to watch there's a link here and there's a link in the
description below and thank you so much for sticking with me all the way it into
the video I really do appreciate it I'll see in the next video