/ Equity Research / LEG | Page 2
Leggett & Platt Incorporated
/ (LEG-NYSE)/ Equity Research / LEG | Page 2
Current Recommendation / NEUTRAL
Prior Recommendation / Underperform
Date of Last Change / 05/22/2012
Current Price (05/21/12) / $20.25
Target Price / $21.00
Leggett posted a flat year-over-year earnings of $0.30 per share for first-quarter 2012, benefiting from increased sales, but offset by higher tax rate. Further, quarterly earnings fell short of the Zacks Consensus Estimate by a couple of cents. Total sales climbed 5.7%, primarily driven by the acquisition of Western Pneumatic Tube and increased same-location sales. Anticipating a modest economic recovery, the company raised its fiscal 2012 earnings projection to a range of $1.25-$1.45 per share from $1.20-$1.40 guided earlier. Moreover, the company’s strategy to optimize capital allocation and increase focus on core businesses bode well for future operating performance. However, intense competition from global and regional players, volatility in raw material prices and exposure to adverse foreign currency translations may undermine the company’s future performance. Currently, we are maintaining a long-term Neutral recommendation on the stock.
SUMMARY
/ Equity Research / LEG | Page 2SUMMARY DATA
52-Week High / $25.8352-Week Low / $17.87
One-Year Return (%) / -15.00
Beta / 1.17
Average Daily Volume (sh) / 2,354,759
Shares Outstanding (mil) / 140
Market Capitalization ($mil) / $2,835
Short Interest Ratio (days) / 10.07
Institutional Ownership (%) / 72
Insider Ownership (%) / 2
Annual Cash Dividend / $1.12
Dividend Yield (%) / 5.53
5-Yr. Historical Growth Rates
Sales (%) / -8.5
Earnings Per Share (%) / 0.4
Dividend (%) / 6.5
P/E using TTM EPS / 17.2
P/E using 2012 Estimate / 15.5
P/E using 2013 Estimate / 13.9
Zacks Rank *: Short Term
1 – 3 months outlook / 3 - Hold
* Definition / Disclosure on last page
Risk Level * / Average,
Type of Stock / Mid-Blend
Industry / Furniture
Zacks Industry Rank * / 215 out of 267
OVERVIEW
Headquartered in Carthage, Missouri, Leggett and Platt Inc. is a global manufacturer that conceives, designs, and produces a broad variety of engineered components and products found in many homes, offices, retail stores, and automobiles. The company’s most important product lines include: components for residential furniture and bedding, retail store fixtures and point of purchase displays, and components for office furniture. In addition, Leggett makes non-automotive aluminum die castings, drawn wire steel, automotive seat and lumbar systems, and bedding industry machinery. The company has more than 140 production facilities located in 18 countries. The company reports its operating results under the following segments:
Ø Residential Furnishings manufacture a range of components used by bedding and upholstered furniture manufacturers in the assembly of their finished products. This division also supplies carpet cushion, adjustable beds, ornamental beds and geo components. During fiscal 2011, this segment contributed 47%% to total revenue.
Ø Commercial Fixturing & Components segment manufactures retail store fixtures and point of purchase displays. The segment also produces chair controls, bases and other components for office furniture manufacturers. During fiscal 2011, this segment contributed 13% to total revenue.
Ø Specialized Products division produces lumbar systems and wire components used by automotive seating manufactures. This segment also manufactures racks, and shelving and cabinets used to outfit service vans. During fiscal 2011, this segment contributed 19% to total revenue.
Ø Industrial Materials segment produces and provides steel rod, drawn steel wire, steel billets and welded steel tubing to its customers. During fiscal 2011, this segment contributed 21% to total revenue.
REASONS TO BUY
Ø Leggett and Platt is a leading manufacturer of components of residential and office furniture, carpet underlay, drawn steel wire and automotive seat support and lumbar systems in North America. Moreover, the company has a well-diversified customer base and solid research and development (R&D) capabilities. This offers a competitive edge to the company and strengthens its pricing power in the market.
Ø Despite higher tax rate in first-quarter 2012, Leggett posted a flat year-over-year earnings $0.30 per share. The negative impact of higher tax burden was fully offset by a 5.7% increase in the company’s top-line, primarily benefiting from the acquisition of Western Pneumatic Tube along with increased same-location sales. Going forward, the company expects to gain momentum as the economy expands. Anticipating a modest economic recovery in 2012, the company has raised its sales forecast for the fiscal in the range of $3.65-$3.85 billion instead of $3.60-$3.80 billion anticipated earlier. Further, the company forecasts earnings per share between $1.25 and $1.45 for 2012, up from $1.20-$1.40 guided earlier.
Ø Leggett is in the midst of its three-part strategic plan announced in November 2007. The company has till now successfully completed the first two-part of its strategic plan. The first part of the strategic plan was to divest low performing businesses while the second part comprised improvement in margins and returns. At present, Leggett is moving toward the third part of its strategic plan to achieve an annual growth rate of 4% to 5%. Moreover, we believe Leggett has significant operating leverage to accomplish its third part of strategic plan as the company has a considerable amount of retained spare production to meet the demand of $4 billion. Hence, the company will not require any large capital investment.
Ø In order to enhance the core business operations and improve financial flexibility, Leggett is continuously taking strategic actions to add new products to its portfolio as per the consumers changing preferences and simultaneously divesting the low performing businesses. Recently, the company enhanced its industrial material segment’s product portfolio by acquiring Western Pneumatic Tube Holding, which is a leading provider of integral components for critical aircraft to aerospace industry. The company expects the acquisition to be slightly accretive to its earnings in the first year of acquisition and will form a new business unit within the company’s Industrial Materials segment.
REASONS TO SELL
Ø The company faces intense competition from its rivals, such as Flexsteel Industries Inc., Genuine Parts Co., Steelcase Inc., The Rowe Companies, and Knape & Vogt Manufacturing Co. Furthermore, Leggett and Platt also face competition from local and regional players in the respective countries. Being in such a high competitive industry, Leggett may find it difficult to execute and implement new business strategies, which in turn, will impact its operations adversely.
Ø Leggett’s operating performance is heavily dependent on the price of raw materials, particularly steel. Global steel markets are cyclical in nature and the commodity has witnessed extreme volatility in the recent years, leading to significant swings in pricing and margins for the company. Moreover, higher raw material prices have prompted some of Leggett’s customers to prefer lower cost components over higher cost ones, thereby adversely affecting margins. A continuation of this trend is likely to affect the company’s operating performance.
Ø Leggett’s significant international presence exposes it to unfavorable foreign currency translations. However, doing business in foreign countries may have a substantial effect on Leggett’s operations and financial performance, as almost 25% of the company’s revenue is generated from its international operations.
RECENT NEWS
Leggett Misses on Bottom Line – April 26, 2012
Leggett & Platt posted a flat year-over-year earnings of $0.30 per share for first-quarter 2012, missing the Zacks Consensus Estimate of $0.32. Benefits from increased sales were fully offset by higher tax rate, resulting in flat year-over-year earnings growth.
Total sales in the quarter climbed 5.7% to $946.8 million compared with $895.8 million a year ago, benefitting from the acquisition of Western Pneumatic Tube and increased same-location sales. The company’s quarterly sales also rose above the Zacks Consensus Estimate of $928 million. Same-location sales increased 4.5%, driven by unit volume and inflation.
Segment Revenue
Residential Furnishings revenue for the first quarter climbed 7.1% to $492.6 million driven by 2% increase in inflation and a 5% rise in unit volume. However, operating income declined 5% to $40.2 million compared with $42.1 million in the prior-year quarter as the benefit from increased sales were more than offset by higher raw material costs and unfavorable product mix.
Sales of Commercial Fixturing & Components moved down 11.5% to $114.2 million, primarily due to divesture and an 8% decline in same location sales. Consequently, operating income during the quarter decreased 12% to $7.2 million compared with $8.2 million in the prior-year quarter.
First quarter sales for the Industrial Materials segment was up 13% to $237.7 million backed by higher inflation, benefit from acquisition of Western Pneumatic Tube and higher same location sales, partially offset by a 1% decline in unit volume. Conversely, operating income declined 16%, primarily due to some adjustment regarding the acquisition of Western Pneumatic Tube.
Specialized Products segment witnessed growth of 6% to $185.3 million in the first quarter. However, operating income inched down 1% to $17.9 million compared with $18.1 million.
Margins
Gross profit for the quarter grew 4.9% to $178.3 million, while gross margin contracted 20 basis points to 18.8%, mainly due to higher cost of goods sold. Operating income remains almost flat at $74.6 million compared with $74.2 million in the prior-year quarter. However, operating margin shrunk 40 basis points to 7.9% due to a 2% increase in selling & administrative expenses and lower gross margin.
Other Financial Details
Leggett exited the first quarter of fiscal 2012 with cash and equivalents of $261.2 million, long-term debt of $1,046.8 million, and shareholders' equity of $1,343.2 million. During the quarter, the company generated $65.1 million cash from operations and paid $39 million toward dividend and $2.5 million to buy back the company’s shares.
Guidance
Going forward, the company expects to gain momentum as the economy expands. Anticipating a modest economic recovery in 2012, the company has raised its sales forecast for the fiscal in the range of $3.65-$3.85 billion instead of $3.6-$3.8 billion anticipated earlier. Further, the company forecasts earnings per share between $1.25 and $1.45 for 2012, up from $1.20-$1.40 guided earlier.
For 2012, the company expects to generate more than $325 million in cash from operations instead of its previous expectation of $300 million, with capital spending and dividends estimated at about $100 million and $160 million, respectively. Further, the company remains open to capture acquisition opportunities that fit its strategy and meet its criteria.
VALUATION
One of the leading global manufacturer of engineered components and products found in many homes, offices, retail stores, and automobiles, Leggett & Platt has a well-diversified customer base and solid research and development (R&D) capabilities which provides a competitive edge to the company and strengthens its pricing power in the market. Moreover, the company’s strategy to optimize capital allocation and increase focus on core businesses bode well for future operating performance. However, intense competition from global and regional players and volatility in raw material prices may dent the company’s future operating performance.
Currently, Leggett and Platt’s trailing 12-month earnings multiple is 17.2x compared with the 18.4x industry average and 13.4x for the S&P 500. Over the last five years, Leggett and Platt’s shares have traded in the range of 13.4x to 33.0x trailing 12-month earnings. The stock is trading at a discount to the industry average based on forward earnings estimates. Our long-term Neutral recommendation on the stock indicates that it would perform in line with the broader market. Our target price of $21.00, 16.0x 2012 EPS, reflects this view.
Key Indicators
Earnings Surprise and Estimate Revision History
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DISCLOSURES & DEFINITIONS
The analysts contributing to this report do not hold any shares of LEG. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts’ personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will underperform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1025 companies covered: Outperform - 14.0%, Neutral - 80.7%, Underperform – 4.4%. Data is as of midnight on the business day immediately prior to this publication.
Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company’s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock’s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.