Leggett Stays Neutral


We are maintaining our long-term ‘Neutral’ recommendation on Leggett & Platt Inc. (LEG), the manufacturer of diversified engineered products and components. The company is currently a Zacks #2 Rank, which translates to a short-term Buy rating.

Our recommendation is based mainly on Leggett’s raised fiscal 2012 expectations, its strategy to optimize capital allocation and its increased focus on core businesses. However, these were offset by the scenario of intense competition from global and regional players, volatility in raw material prices and exposure to adverse foreign currency translations.

Driven by improved margins, Leggett reported a better-than-expected bottom-line performance in the second quarter of 2012 with earnings climbing 11.4% year over year to 39 cents per share. The result also beat the Zacks Consensus Estimate of 36 cents. Moreover, the company registered an improvement in gross and operating margins of 70 and 80 basis points, respectively.

Buoyed by better-than-expected bottom-line results, management raised its 2012 earnings guidance to between $1.35 and $1.50 per share on projected sales between $3.65 billion and $3.8 billion. Earlier, the company had forecasted earnings of $1.25 to $1.45 per share.

The Missouri-based manufacturer of components for residential and office furniture, carpet underlay, drawn steel wire and automotive seat support and lumbar systems is continually enhancing its core business operations while improving its financial flexibility. Leggett is constantly taking strategic actions to add new products to its portfolio while simultaneously divesting the low performing businesses.

Additionally, Leggett has a well-diversified customer base and solid research and development (R&D) capabilities, offering a competitive edge while strengthening its pricing power in the market.

On the flip side, Leggett operates in a highly competitive industry, and thus may find it difficult to execute and implement new business strategies. The company faces stiff competition from its rivals, such as Flexsteel Industries Inc. (FLXS), Genuine Parts Company (GPC) and Steelcase Inc. (SCS). Furthermore, Leggett faces competition from local and regional players in the respective countries.

Leggett’s operating performance is heavily dependent on the price of raw materials, particularly steel. Global steel markets are cyclical in nature and the commodity has witnessed extreme volatility in the recent years, leading to significant swings in pricing and margins for the company. A continuation of this trend is likely to affect the company’s operating performance.

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