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Leggett's (LEG) Strategic Growth Plan Bodes Well, Costs High

Zacks Equity Research

Long-term strategic initiatives, inorganic moves and material price inflation are substantial growth drivers of Leggett & Platt, Inc. LEG. However, higher steel costs and pricing lag remain concerns.

Shares of this Zacks Rank #3 (Hold) company have gained 38.6% in the past three months compared with the industry's 25.7% rally.


Let’s delve deeper into the substantial factors driving its growth

Strategic Initiatives to Drive Profitability: Leggett has been benefiting from the long-term strategic plan that was initiated in late 2007. The company has successfully completed the first two parts and is currently working on the third part of the plan. The first and second parts emphasised on the divesture of low-performing businesses, and improving margins and returns, respectively. The third part of this strategic plan aims at achieving 4-5% annual top-line growth.

During the first quarter, its net sales of $1,155.1 million increased 12% from the prior-year level of $1,028.8 million.

Inorganic Moves: Acquisitions have been one of the most significant moves of the company. In January 2019, Leggett & Platt acquired Elite Comfort Solutions, Inc. (“ECS”). ECS is a leader in proprietary specialized foam technology, primarily for bedding and furniture industries, with a vertically integrated model and 16 facilities across the United States.

During the first quarter, acquisitions contributed around 13% to sales.

Steel Inflation Aiding Top-Line Growth: Leggett has been experiencing strong sales growth, attributable to the benefits received from raw material price inflation and positive currency impact, alongside a rise in volume. Organically, sales grew 8% during 2018, mainly attributable to a 3% gain from raw material price inflation and currency tailwinds, alongside a 3% rise in volume. Total sales, including inter-segment sales, were up 8.3% in 2018.


Lower Deliveries: Although it recorded a positive revenue surprise in the first quarter of 2019, it has a dismal sales surprise history. The company missed the consensus mark for sales in eight of the last 10 quarters, owing to lower deliveries across the business, especially in Home Furniture, Fashion Bed and Flooring Products. The Furniture Products segment sales decreased 5.2% from the year-ago figure on 5% lower volumes during the first quarter.

Higher Raw Material Cost Inflation Hurts: Adjusted earnings dipped 14% in the first quarter, owing to challenges in its furniture products segment on weaker demand and higher raw material cost.

Notably, the company’s performance over the last few quarters was mainly hurt by volatility in raw material prices, with steel being one of the key raw materials and the cyclical nature of the steel market. Further, margins remained under pressure mainly due to commodity and steel cost inflation.

Key Picks

Leggett currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks in the Zacks Construction sector are Construction Partners, Inc. ROAD, Quanex Building Products Corp. NX and TopBuild Corp. BLD, each carrying a Zacks Rank #1.

Construction Partners has a three-five year expected EPS growth rate of 10%.

Quanex Building Products and TopBuild’s earnings for the current year are expected to grow 30.8% and 21.8%, respectively.

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Quanex Building Products Corporation (NX) : Free Stock Analysis Report
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Leggett & Platt, Incorporated (LEG) : Free Stock Analysis Report
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