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Legget & Platt (LEG) Down 9.9% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

It has been about a month since the last earnings report for Legget & Platt (LEG). Shares have lost about 9.9% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Legget & Platt due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Leggett's (LEG) Q2 Earnings Beat, Sales Miss, Guidance Cut

Leggett & Platt, Incorporated reported second-quarter 2019 earnings, wherein earnings surpassed the Zacks Consensus Estimate but revenues missed the same.

Adjusted earnings of 64 cents per share beat the Zacks Consensus Estimate and came ahead of the year-ago profit level of 63 cents by 2%. Its quarterly performance was impacted by declines in Automotive and weak trade demand in the Industrial Products segment. Again, lower volume from businesses exited in the Furniture Products segment added to the woes. However, positives like solid contribution from the Elite Comfort Solutions (“ECS”) acquisition, and continued market share and content gains in U.S. Spring led to the upside.

Delving Deeper

The company’s net sales of $1,213.2 million missed the consensus mark of $1,276 million by 4.9% but increased 10% from the prior-year level. The improvement was primarily driven by solid contribution from its ECS acquisition. It also benefited from ongoing market share and content gains in U.S. Spring (up 4%). However, the positives were partly offset by lower volumes arising from its decision to exit businesses in the Furniture Products segment, weak trade demand in the Industrial Products segment and softer demand in Automotive.

Volumes declined 6% in the quarter versus 6% growth reported in the year-ago level. Organically, sales decreased 6% in the quarter against 10% growth in second-quarter 2018. That said, smaller acquisitions contributed 16% to sales in the quarter. Raw material-related selling price increased 2%, which was partially offset by a negative currency impact of 2%.

The company’s overall gross margin expanded 120 basis points (bps) to 22.2% in the quarter. Adjusted EBIT margin also advanced 20 bps to 11.2%, primarily due to lower raw material costs (including LIFO benefit). Also, the ECS acquisition added to the positives. However, these increases were partially offset by lower volume in several businesses and other smaller items. Adjusted EBITDA margin increased a notable 130 bps year over year to 15.3% in the quarter.

Segment Details

Net sales in Residential Products (excluding inter-segment sales) increased 38.3% from the year-ago quarter to $606.7 million. Organically, sales decreased 1% (versus 7% growth registered in the year-ago quarter). Volume was down 2% as market share and content gains in U.S. Spring were offset by declines in other businesses. That said, raw material-related selling price increases, net of currency impact, added 1% to sales. Including inter-segment sales, total sales in the segment rose 37.6% from a year ago to $610.3 million.

The Industrial Products segment's sales declined 16.6% from the prior-year level to $80.4 million. Organically, sales decreased 9% against 23% growth a year ago. Total sales, including inter-segment revenues, were up 8.5% from the year-ago period to $156 million, mainly driven by 8% raw material price increases. However, this increase was partially offset by a 17% decline in steel rod and wire volume.

Net sales at Furniture Products decreased 11.1% from the year-ago figure to $259.1 million on 11% lower volumes. Its exit from Fashion Bed and planned declines in Home Furniture impacted the results. Raw material-related selling price increases were offset by a negative currency impact. Total sales of the segment (including inter-segment sales) fell 11.4% year over year to $261.3 million. Organically, sales were down 11% against 9% growth in the comparable period last year.

The Specialized Products segment's sales dropped 3.2% from the prior-year figure to $267 million. Organically, sales were down 3% (versus 11% growth in second-quarter 2018), mainly due to a negative currency impact of 3% and softer demand in the automotive market. Total sales of the segment (including inter-segment sales) also declined 3.2% from the year-ago level to $267.7 million.

Financials

Leggett ended the second quarter with cash and cash equivalents of $289.7 million versus $268.1 million at 2018-end. The company had a long-term debt of $2.36 billion versus $1.17 billion at 2018-end. It generated $172.3 million cash flow from operations in the quarter, up 11.4% year over year.

2019 Guidance Lowered

Sales are projected at approximately $4.7-$4.85 (versus $4.95-$5.1 billion expected earlier), indicating an increase of 10-14% from the 2018 level. The company expects the ECS acquisition to contribute approximately $600 million to 2019 revenues. Sales growth is expected to decline 1-5% on an organic basis (compared with the earlier expectation of 0-3% growth). The company expects sales growth to benefit significantly from the ECS acquisition. It continues to expect sales growth in Automotive, U.S. Spring, Aerospace, Hydraulic Cylinders, and Work Furniture to be more than offset by the exit of Fashion Bed and a lower-margin business in Home Furniture. It expects EBIT to benefit from higher sales and decreasing steel costs (including LIFO benefit). Adjusted earnings are now likely to be in the range of $2.40-$2.60 per share versus $2.45-$2.65 expected earlier. Adjusted EBIT margin is envisioned to be nearly 11.1-11.4% versus prior projection of 10.8-11.2%. Leggett expects 2019 operating cash flow from operations to be about $550 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, Legget & Platt has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Legget & Platt has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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