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Here's Why Leggett (LEG) is Performing Better Than Its Industry

Leggett & Platt, Incorporated’s LEG shares have been outpacing the Zacks Furniture industry this year. In the year-to-date period, the stock has slipped just 1.8% compared with the industry’s 14.2% fall.

This global manufacturer of a wide variety of engineered components has been benefiting from its long-term strategic plan. Also, raw material-related selling price increases and bolt-on acquisitions are added positives. Impressive liquidity is also helping it combat persistent macroeconomic pressure and reward shareholders.

The overall furniture market is highly fragmented and has been grappling with supply chain disruptions and high inflation rates. LEG is also witnessing lower metal margins in the Steel Rod business, soft volume in some businesses and moderate pricing pressure from deflation.

Let’s discuss the factors influencing growth of this Zacks Rank #3 (Hold) company. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Strategic Long-Term Moves: Leggett remains on track with its long-term strategic plan, which was announced in November 2007. The company has completed the first two parts of its strategic plan and is now working on the third, which aims to achieve top-line growth of 6-9% annually. This long-term revenue target assumes 6% organic growth, coupled with growth from acquisitions.

In 2022, net trade sales increased by 1% from 2021 despite industry-related woes. Of this growth, raw material-related selling prices added 9% 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 most definitely gain traction as the effects of the pandemic gradually phase out.

Acquisitions to Boost Organic Growth: Leggett’s business depends largely on acquisitions as part of its growth strategy to supplement organic growth and expand across boundaries.

In early October and mid-December 2022, the company acquired two Canadian distributors of products used for erosion control, stormwater management, and various other applications. These acquisitions became part of the Furniture, Flooring & Textile Products segment.

The company anticipates the acquisitions completed in 2022 will contribute 3% to sales growth in 2023. The company did not acquire any businesses in first-quarter 2023 and expects minimal acquisition activity in the rest of 2023.

Strong Liquidity to Boost Shareholders’ Return: As of Mar 31, 2023, the company had cash and cash equivalents of $345 million compared with $315 million at 2022-end, which is enough to meet the company’s current debt maturity of $9 million. Cash generated from operating activities was $97 million, up $58 million compared to the prior-year period. Capital expenditures were $38 million during first-quarter 2023.

On May 4, 2023, the company announced that it has increased its quarterly dividend to 46 cents per share, reflecting a 4.5% increase from the year-ago period. During first quarter 2023, Leggett repurchased 0.1 million shares at an average price of $34.04 and issued 0.5 million shares through employee benefit plans.

Factors Impacting Margins

Macro-Economic Woes: Consumers in the housing and related industries are increasingly concerned about rising inflation. During  first-quarter 2023, adjusted EBIT and adjusted EBITDA margin contracted 300 basis points (bps) and 280 bps, respectively, due to lower volume, lower metal margin in the Steel Rod business and lower overhead recovery.

Leggett has been witnessing supply chain disruptions, especially in chemicals, semiconductors, labor and transportation, which are constraining volume growth. During first-quarter 2023, volume was down 7%, primarily from demand softness in residential end markets.

Volume was down 9% in Bedding and 15% in Furniture, Flooring & Textile Products primarily due to demand softness in U.S. bedding markets and lower trade demand in Steel Rod and Drawn Wire businesses, as well as in Home Furniture, Flooring, and Fabric Converting.

Tepid Views: Leggett anticipates second-quarter to be similar to the first quarter, mainly owing to the timing of performance-based compensation accruals and normal seasonality in some of its businesses.

For 2023, Leggett expects sales in the range of $4.8–$5.2 billion. This indicates a 7% decline to 1% growth year over year. The raw material-related price decrease and currency impact are likely to reduce sales by mid-single digits. Sales are likely to be down in the low single digits in Bedding Products, up high single digits in Specialized Products and down low single digits in Furniture, Flooring & Textile Products segments.

For 2023, earnings are expected to be between $1.50 and $1.90 per share, down from 2022 levels due to lower metal margins in the Steel Rod business, lower volume in some businesses and moderate pricing pressure from deflation. The company expects an EBIT margin of 7.5-8% in 2023.

Top-Ranked Stocks in the Consumer Discretionary Sector

Some better-ranked stocks from the Zacks Consumer Discretionary sector are Group Limited TCOM and Skechers U.S.A., Inc. SKX and MGM Resorts International MGM carries a Zacks Rank #1 (Strong Buy). TCOM has a trailing four-quarter earnings surprise of 153.1%, on average. Shares of TCOM have gained 46.6% in the past year.

The Zacks Consensus Estimate for TCOM’s 2023 sales and EPS indicates a rise of 76.9% and 334.5%, respectively, from the year-ago period’s levels.

Skechers carries a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 19%, on average. Shares of SKX have increased 31.7% in the past year.

The Zacks Consensus Estimate for SKX’s 2023 sales and EPS indicates a rise of 7.8% and 32%, respectively, from the year-ago period’s levels.

MGM Resorts International carries a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 81.1%, on average. Shares of MGM have increased 14.6% in the past year.

The Zacks Consensus Estimate for MGM’s 2023 sales indicates a rise of 15.4% but EPS indicates a fall of 46.1%, from the year-ago period’s levels.

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