Leggett & Platt, Incorporated’s LEG shares have been improving compared with the Zacks Furniture industry, the Zacks Consumer Discretionary sector and S&P 500 index. In the past six months, the stock has gained 5.8% compared with the industry’s 5.5% increase. The sector and S&P 500 index have declined 17.6% and 6.6%, respectively, in the same time frame.
This global manufacturer of a wide variety of engineered components benefits from its long-term strategic plan, raw material-related selling prices increase and bolt-on acquisitions. Also, impressive liquidity is helping it to combat inflationary pressure and reward shareholders with regular dividends.
However, supply chain disruptions, especially in chemicals, semiconductors, labor and transportation, constrain volume growth. Also, inflation is denting profitability.
Image Source: Zacks Investment Research
Let’s discuss the factors influencing this Zacks Rank #4 (Sell) company.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Strategic Moves: Leggett remains on track with its long-term strategic plan, which was announced in November 2007. The company completed the first two parts of its strategic plan and is now working on the third part of the plan that aims to achieve top-line growth of 6-9% annually. This long-term revenue target assumes 6% organic growth and growth from acquisitions.
In first-half 2022, net trade sales increased 10% from the prior-year levels. Of this growth, raw material-related selling price added 14% and acquisitions (net of divestitures) contributed 1% to sales. Although the recent market slowdown arising from macro market uncertainties may compel the company to carry out the plan at a slower pace, it will certainly gain traction as the effects of the pandemic gradually phase out.
Accretive Acquisitions: Leggett’s business depends largely on acquisitions as part of its growth strategy to supplement organic growth and expand across boundaries. In the long term, it expects these strategic acquisitions to generate 6-9% revenue growth annually.
In first-half 2021, Leggett acquired three businesses. On Jun 4, 2021, it acquired Kayfoam — a leading provider of specialty foam and finished mattresses, primarily serving customers in the U.K. as well as Ireland. Located near Dublin, Kayfoam has two manufacturing facilities with combined annual sales of approximately $80 million. Similar to the U.S. Bedding business, the Kayfoam acquisition allows Leggett to support European bedding customers.
Moreover, no businesses were acquired during first-half 2022.
Strong Liquidity: Leggett has enough liquidity to manage the ongoing crisis. As of Jun 30, 2022, the company had $1.3 billion in total liquidity, including cash and equivalents of $269.9 million. Long-term debt at June-end was $1.79 billion, down from the 2021-end. It has $300 million in senior notes due on Aug 15, 2022, which LEG expects to pay with cash on hand and commercial paper borrowing. This apart, the company has no significant debt maturity before 2024.
Leggett has been actively managing cash flows, returning considerable free cash to investors through share repurchases and dividends. In May 2022, the company announced that it had increased the quarterly dividend to 44 cents per share, reflecting a 4.8% increase from a year ago period. This marks its 51st year of a consecutive annual dividend increase and places the company among 31 other companies, known as "Dividend Kings”, with at least 50 years of consecutive annual dividend increases. Its long-term targeted dividend payout ratio is approximately 50% of adjusted EPS.
Factors Impacting Margins
Intense Inflation: Consumers in the housing industry are increasingly concerned about rising inflation. During first-half 2022, adjusted EBIT and adjusted EBITDA margin contracted 60 basis points (bps) and 110 bps, thanks to lower volume, higher raw material and transportation costs and production inefficiencies and related premium freight costs.
Due to these headwinds, Leggett reduced its earnings and EBIT guidance for 2022. Earnings for the year are now expected to be between $2.65 and 2.80 per share, down from the prior expectation of $2.70-$3.00. The company expects an EBIT margin of 10.5-10.7% (lowered upper range from 11%) compared with 11.2% reported in 2021.
Supply Chain Bottlenecks: Leggett has been witnessing supply chain disruptions. In the first and the second quarter, volume was down 4% and 6% year over year, respectively, due to demand softness in residential end markets, mostly in Bedding. Market demand remains soft due to reduced consumer activity and elevated inventory levels across the industry. The Specialized Products unit also witnessed lower volume in Automotive, primarily due to the Russia-Ukraine ongoing conflict. In Aerospace, the industry is not anticipated to return to 2019 demand levels until 2024 due to these headwinds.
Leggett expects demand softness to continue throughout the third and fourth quarters. Year-over-year low-to-mid single-digits down volume are likely to dent the company’s top line in 2022. Sales are likely to be down low-double digits in Bedding Products and roughly flat in Furniture, Flooring & Textile Products segment.
Dependency on Housing Market: The furniture industry is directly related to the housing market. The housing industry is cyclical and affected by consumer confidence levels, prevailing economic conditions and interest rates. The federal government’s actions related to economic stimulus, taxation and borrowing limits could affect consumer confidence and spending levels, which might hurt the economy and the housing market. Leggett also remains vulnerable to other macroeconomic factors like unemployment, fluctuating interest rates and disposable income levels.
Some Better-Ranked Stocks in the Consumer Discretionary Sector
Some better-ranked stocks in the sector are Marriott Vacations Worldwide Corporation VAC Hyatt Hotels Corporation H and Choice Hotels International, Inc. CHH.
Marriott Vacations sports a Zacks Rank #1. VAC has a trailing four-quarter earnings surprise of 13.9%, on average. The stock has declined 5.4% in the past year.
The Zacks Consensus Estimate for VAC’s current financial year sales and earnings per share (EPS) indicates an increase of 19.7% and 131.4%, respectively, from the year-ago period’s reported levels.
Hyatt carries a Zacks Rank #2 (Buy). H has a trailing four-quarter earnings surprise of 798.8%, on average. The stock has increased 25.3% in the past year.
The Zacks Consensus Estimate for H’s current financial year sales and EPS indicates growth of 89.1% and 113%, respectively, from the year-ago period’s reported levels.
Choice Hotels carries a Zacks Rank #2. CHH has a trailing four-quarter earnings surprise of 11.2%, on average. The stock has declined 3.6% in the past year.
The Zacks Consensus Estimate for CHH’s current financial year sales and EPS indicates growth of 25.3% and 21.7%, respectively, from the year-ago period’s reported levels.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Hyatt Hotels Corporation (H) : Free Stock Analysis Report
Leggett & Platt, Incorporated (LEG) : Free Stock Analysis Report
Choice Hotels International, Inc. (CHH) : Free Stock Analysis Report
Marriot Vacations Worldwide Corporation (VAC) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research