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Leggett's (LEG) Stock Down 1.7% on Q1 Earnings & Sales Miss

Zacks Equity Research

Leggett & Platt Inc.’s LEG shares dropped 1.7% after it reported lower-than-expected earnings in the first quarter of 2019. Adjusted earnings of 49 cents per share missed the Zacks Consensus Estimate of 52 cents by 5.8%. Also, the said figure decreased 14% from the year-ago level of 57 cents. Its quarterly performance was impacted by declines in Automotive, Fashion Bed, Flooring Products and Adjustable Bed.

Delving Deeper

The company’s net sales of $1,155.1 million missed the consensus mark of $1,184 million by 2.4% but increased 12% from the prior-year level of $1,028.8 million. The uptrend was primarily driven by its recently completed ECS acquisition. It also benefited from ongoing market share and content gains in U.S. Spring and pricing actions in steel-related businesses. However, the positives were partly offset by its decision to exit Fashion Bed and Home Furniture businesses, exchange rate impact, alongside softer demand in Automotive.

Volumes declined 3% in the quarter versus 1% decline recorded in the year-ago period. Organically, sales decreased 1% in the quarter against 6% growth in first-quarter 2018. That said, smaller acquisitions contributed 13% to sales. Raw material-related selling price increased 4%, which was partially offset by a negative currency impact of 2%.

The company’s overall gross margin contracted 90 basis points (bps) to 20.2% in the quarter.

Adjusted EBIT margin also declined 130 bps to 9.1%. Improved metal margins at the steel rod mill and earnings attributable to the ECS acquisition were more than offset by declines in Automotive, Fashion Bed, Flooring Products, and Adjustable Bed.

Leggett & Platt, Incorporated Price, Consensus and EPS Surprise

Leggett & Platt, Incorporated Price, Consensus and EPS Surprise | Leggett & Platt, Incorporated Quote

Segment Details

Net sales in Residential Products (excluding inter-segment sales) increased 34.7% from the year-ago quarter to $536.4 million. Organically, sales increased 3% (versus 1% in the year-ago quarter) from raw material-related selling price increases, net of currency impact. Volume remained flat as market share and content gains in U.S. Spring and growth in International Spring were offset by declines in other businesses.

Including inter-segment sales, total sales in the segment rose 33.9% from a year ago to $539.2 million.

The Industrial Products segment's sales improved 8.7% from the prior-year level to $89.1 million. Organically, sales increased 10% versus 13% growth a year ago. Total sales, including inter-segment revenues, were up 10.2% from the year-ago period to $168 million, mainly driven by 19% raw material price inflation. However, this increase was partially offset by a 9% decline in volume.

Net sales at Furniture Products decreased 5.2% from the year-ago figure to $266.7 million on 5% lower volumes. Its exit from Fashion Bed, planned declines in Home Furniture and lower sales in Adjustable Bed impacted the results. Also, raw material-related selling price increases were offset by a negative currency impact. Total sales of the segment (including inter-segment sales) fell 5.1% year over year to $269.7 million. Organically, sales were down 5% versus 3% growth in the comparable period last year.

The Specialized Products segment's sales dropped 1.7% from the prior-year figure to $262.9 million on the back of the Precision Hydraulic Cylinders (“PHC”) acquisition that contributed 3% to sales. Organically, sales were down 5% (versus 11% growth in first-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 1.6% from the year-ago level to $263.8 million.

Financials

Leggett ended the first quarter with cash and cash equivalents of $263.3 million versus $268.1 million at 2018-end. The company had a long-term debt of $2.41 billion versus $1.17 billion at 2018-end. It generated $31.4 million cash flow from operations in the quarter, down 29% year over year.

2019 Guidance Reaffirmed

Sales are projected at approximately $4.95-$5.1 billion, indicating an increase of 16-19% from the 2018 level. The company expects the Elite Comfort Solutions (“ECS”) acquisition to contribute approximately $650 million to 2019 revenues. Additionally, sales growth is expected within 0-3% on an organic basis.

Depreciation and amortization in 2019 are expected to be approximately $210 million, and net interest is projected at about $95 million. Notably, the guidance considers an effective tax rate of 24% versus 20% in 2018.

On the basis of slightly higher organic sales and moderating steel inflation, adjusted earnings are likely to be in the range of $2.45-$2.65 per share. Adjusted EBIT margin is envisioned to be nearly 10.8-11.2%.

For 2019, Leggett expects operating cash flow from operations of about $550 million. Capital expenditure for the year is projected at $195 million and dividend payouts are expected to be $205 million. Furthermore, it expects payout for 2019 to be above the target of nearly 50%.

Zacks Rank & Stocks to Consider

Leggett currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the Zacks Construction sector are Masonite International Corporation DOOR, Arcosa, Inc. ACA and Construction Partners, Inc. ROAD, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Masonite International’s earnings for 2019 are expected to grow 8.4%.

Arcosa and Construction Partners’ three-five year expected EPS growth rate is projected at 13.1% and 10%, respectively.

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