We maintain our long-term Neutral recommendation on
Leggett & Platt Inc.
), the manufacturer of diversified engineered products and
components, with a target price of $21 per share.
Our recommendation is mainly based on the company's raised
fiscal 2012 expectations, its strategy to optimize capital
allocation and increased focus on core businesses that bodes well
for future operating performance. 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
Leggett's first-quarter 2012 earnings came in flat versus the
year-ago quarter at 30 cents per share, benefiting from improved
sales, but were offset by a higher tax rate. The company's
quarterly earnings also missed the Zacks Consensus Estimate by a
couple of cents. However, total sales climbed 5.7%, primarily
driven by the acquisition of Western Pneumatic Tube and increased
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. The company also raised its sales
forecast for fiscal 2012 in the range of $3.65-$3.85 billion
instead of $3.60-$3.80 billion anticipated earlier.
Leggett is in the midst of its three-part strategic plan
announced in November 2007. The company has successfully completed
the first two-part of its strategic plan, including divesting low
performing businesses and reviving the company's margins and
returns. Moving into the third stage, the company now expects to
achieve an annual growth rate of 4% to 5%.
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
Further, the Missouri-based manufacturer of components of
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 continuously taking strategic
actions to add new products to its portfolio as per the consumers
changing preferences and simultaneously divesting the low
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, which in turn, will impact its operations
adversely. The company faces stiff competition from its rivals,
Flexsteel Industries Inc.
Genuine Parts Company
). Furthermore, Leggett and Platt also face 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.
Leggett currently retains a Zacks #3 Rank, which translates to a
short-term Hold rating.
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