An indirect investing approach is sometimes the preferred approach, especially when a sector under consideration is wobbling precariously. I thinks that's the case with the housing sector.

To be sure, the full-frontal (direct) investing approach -- Lennar (NYSE: LEN), Beazer (NYSE: BZH), KB Home (NYSE: KBH) or Toll Brothers (NYSE: TOL) -- would probably be the more lucrative approach over the long haul. But, in the short term, the immediate pain -- the prospect of more purchase cancellations, higher interest rates and ballooning foreclosures -- might be too much to bear.

Circling the Edges
I believe in the housing industry, but only agnostically-so in its current state. This is why I'm keen on circling the edges. One company I like on the periphery is Leggett & Platt (NYSE: LEG), a diversified manufacturer of engineered components for homes, offices, retail stores and automobiles. The company's largest segment, residential furnishings, accounts for 47% of sales and includes bedding, home furniture, and fabrics and fibers.

Unlike other companies exposed to housing, Leggett & Platt has been relatively immune to the sector's woes. It's actually thriving. For 2006, the company's profits rose 20% to $300.3 million ($1.61 a share), from $251.3 million ($1.30 a share) in the prior year. Meanwhile, sales grew 4% to $5.51 billion from $5.3 billion.

For 2007, Leggett & Platt expects EPS of $1.60 to $1.80 a share on sales of about $5.6 billion. This brackets Wall Street's estimate of $1.77 per share, but falls short of its original sales expectations of $5.72 billion. Of the expected 6% increase, 2% is expected to come organically while the remainder is expected to come from acquisitions.

Speaking of acquisitions, about two-thirds of Legg & Platt's revenue growth has come from acquisitions in the past 20 years. In the past decade, the average acquisition target had revenues of $15 million to $20 million, which the company believes minimizes the risk from any single acquisition. Today, no single customer accounts for more than 5% of total Leggett & Platt revenue.

Under Appreciated, Possibly Under Valued
With its strong cash flow (net operating cash flow increased to $169.9 million in the most recent quarter, a 15.4% increase compared to the last quarter), Leggett & Platt should be able to continue to pursue acquisitions, fund a continuing share buyback program, support its long-term goal of 15% annual EPS growth and continue to raise the dividend -- which has been increased at an 8% average annual rate for the past 10 years.

What's more, Leggett & Platt's ambitious plans should have negligible impact on financial risk. The current debt-to-equity ratio, 0.47, is low. It is below the industry average, implying successful management of debt levels. Along with this favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.43, which illustrates an ability to avoid short-term liquidity problems.

My 12-month price target for Leggett & Platt's common is $29 a share. It is based on a simple net-present value calculation of an expected 2007 EPS of 1.70 that is expected to grow 3% annually for the next two years and 5% (far below the company's 15% goal) discounted using an 11% rate factor. My valuation is further supported by an average long-term P/E multiple of 17. (To learn more, read Target Prices Vs Ratings and Discounted Cash Flow Analysis.)

My valuation is based on housing's troubles persisting through 2007. Should housing improve this year, my valuation could prove overly conservative.

Looking to cook up a market-stomping stock portfolio? Check out our FREE report "7 Ingredients to Market Beating Stocks" and get started right now!

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  4. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  5. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  6. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  7. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  8. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  9. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  10. Stock Analysis

    GoPro's Stock: Can it Fall Much Further? (GPRO)

    As a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center