Did China Fears Contribute To The Leggett & Platt Upgrade?

Raymond James has turned bullish on home furnishings company Leggett & Platt, Inc. (NYSE: LEG). According to a new report by analyst Budd Bugatch, the firm has upgraded the stock to Outperform and believes that the company’s exposure to China is not fully understood by the market.

China Fears

Leggett & Platt’s stock has fallen more than 10 percent in the past month, and Bugatch believes the primary fear in the market is the risk the company faces from economic weakness in China.

The market sees the company’s outsized exposure to China and has been selling the stock based on assumptions that China weakness will weigh heavily on the company’s bottom line.

For example, Leggett’s automotive business, which has been one of its fastest-growing and most profitable segments, derives up to 50 percent of its revenues from China. However, Bugatch pointed out that only 2–3 percent of the company’s consolidated revenues are consumed in China.

Related Link: Visualizing The Modest Bump In Pending Home Sales Data

Positives

Despite uncertainty in China, Bugatch believes that Leggett is well-positioned to benefit from lower input costs related to the recent strength in the U.S. dollar. Even with the recent economic turbulence in China, the latest Institute of Highway Safety data still call for 4 percent growth and 7 percent growth in the Chinese automotive market in 2015 and 2016, respectively.

Outlook

Bugatch believes that China-related fears have created an excellent opportunity to buy an industry-leading stock at discounted prices. “Leggett’s experienced management, strong customer relationships, and outsized market shares make LEG an excellent long-term holding, in our view,” he explained.

In addition to the upgrade, Raymond James set a price target on the stock of $48.

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