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Can Leggett's (LEG) Strategic Growth Plan Combat Costs Woes?


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Leggett & Platt, Incorporated 's LEG long-term strategic goals, acquisitions and raw material price inflation, along with positive currency impacts are substantial growth drivers. However, higher steel costs and pricing lag, which are common occurrences in case of commodity cost inflation, remain concerns for this Zacks Rank #3 (Hold) company.

Leggett's shares have gained 5.2% in the past three months against the industry 's growth of 2.9%.





Long-Term Strategic Plans & Acquisitions Bode Well

Leggett is riding high on its long-term strategic plan, which was started in November 2007. The company has successfully completed the first two parts and is working on the third part of the plan. While the first part was to divest low-performing businesses, the second one comprised an improvement in margins and returns. The third part of this strategic plan aims at achieving 4-5% annual top-line growth.

Also, Leggett remains on track with its Total Shareholder Return ("TSR") target, which is expected to be accomplished by 2020. The company's operating targets include revenues of $5 billion, operating margin of 13% and EPS of $3.50, with an effective tax rate of 22%, owing to the U.S. tax reform. Leggett believes that these targets are strong TSR drivers. Further, the company expects these targets to be fueled by organic growth, backed by strategic buyouts, given the absence of any non-recurring factors.

Meanwhile, 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. Net sales in the first six months of 2018 grew 9.3% on a year-over-year basis. Organically, sales grew 10% in the second quarter, up from 6% growth recorded in the first quarter of 2018.

Furthermore, acquisitions contributed around 3% and 2% to sales in the second and first quarter, respectively. The company's 2018 sales view was backed by an expectation of mid-single-digit volume growth, raw material price increases and favorable currency. Additionally, the PHC acquisition is likely to contribute 2% to sales growth.

Higher Raw Material Costs Raise Concern

Despite reporting 11% year-over-year growth in net sales, earnings dipped 2% in the second quarter, owing to challenges in its furniture products segment on weaker demand and higher raw material cost.

Notably, its performance over the past few quarters was mainly hurt by volatility in raw material prices, with steel being one of the key raw materials and the steel market being cyclical in nature. Further, margins remained under pressure mainly due to commodity and steel cost inflation. Also, the company trimmed its sales and EPS guidance for 2018 to account for challenges in its furniture products segment on weaker demand and foreign competition.

Sales are now projected to grow nearly 8-10% year over year to $4.25-$4.35 billion, down from the previously guided range of $4.3-$4.4. Management projects earnings from continuing operations in the range of $2.55-$2.70 per share, down 7 cents from $2.60-$2.80 projected earlier.

Zacks Rank & Key Picks

Currently, Leggett carries a Zacks Rank #3 (Hold). Some better-ranked stocks from the same sector include Continental Building Products, Inc. CBPX , PGT Innovations, Inc. PGTI and NCI Building Systems, Inc. NCS . While Continental Building and PGT Innovations sport a Zacks Rank #1 (Strong Buy), NCI carries a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

Continental Building's earnings for 2018 are expected to increase 52.6%.

PGT Innovations' 2018 earnings are expected to grow 78.7%.

NCI is expected to record 81.3% earnings growth in fiscal 2018.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



This article appears in: Investing , Business , Stocks
Referenced Symbols: CBPX , PGTI , NCS , LEG



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