We are maintaining our long-term 'Neutral' recommendation on
Leggett & Platt Inc.
), the manufacturer of diversified engineered products and
components. The company is currently a Zacks #2 Rank,
which translates to a short-term Buy rating.
Our recommendation is based mainly on Leggett's raised
fiscal 2012 expectations, its strategy to optimize capital
allocation and its increased focus on core businesses. However,
these were offset by the scenario of intense competition from
global and regional players, volatility in raw material prices and
exposure to adverse foreign currency translations.
Driven by improved margins, Leggett reported
a better-than-expected bottom-line performance in the second
quarter of 2012 with earnings climbing 11.4% year over year to 39
cents per share. The result also beat the Zacks Consensus Estimate
of 36 cents. Moreover, the company registered an improvement in
gross and operating margins of 70 and 80 basis points,
Buoyed by better-than-expected bottom-line results, management
raised its 2012 earnings guidance to between $1.35 and
$1.50 per share on projected sales between $3.65 billion and $3.8
billion. Earlier, the company had forecasted earnings of $1.25
to $1.45 per share.
The Missouri-based manufacturer of components for
residential and office furniture, carpet underlay, drawn steel wire
and automotive seat support and lumbar systems is continually
enhancing its core business operations while improving its
financial flexibility. Leggett is constantly taking strategic
actions to add new products to its portfolio while
simultaneously divesting the low performing businesses.
Additionally, Leggett has a well-diversified customer base and
solid research and development (R&D) capabilities, offering a
competitive edge while strengthening its pricing power in the
On the flip side, Leggett operates in a highly competitive
industry, and thus may find it difficult to execute and implement
new business strategies. The company faces stiff competition from
its rivals, such as
Flexsteel Industries Inc.
Genuine Parts Company
). Furthermore, Leggett faces competition from local and regional
players in the respective countries.
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. A continuation of this trend
is likely to affect the company's operating performance.
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