Leggett (LEG) Poised for Long-Term Growth: Time to Hold?

Leggett & Platt Inc.LEG looks in good shape driven by its strategies to enhance business portfolio, disciplined capital allocation, and progress on goals for 2019. This has helped the company retain its Zacks Rank #3 (Hold). Further, the company's long-term earnings growth rate of 9.7% and Value Score of B, highlight its inherent strength.

Key Growth Drivers

Long-Term Strategic Plan

Leggett remains on track with its long-term strategic plan, which was announced in November 2007. After completing the first two parts, the company is working on the third part that aims to achieve top-line growth of 4-5% annually. As part of the plan, the company remains focused on boosting business portfolio by increasing investment in areas that provide a competitive edge while simultaneously exiting underperforming operations and markets.

Some of the recent steps taken to enhance business portfolio include the acquisitions of a manufacturer of aerospace tube assemblies; a distributor of geosynthetic products, and a South African innerspring manufacturer. Further, the company bought the remaining minority stake in a core automotive joint venture in China, alongside continuing with its capital investments to fuel organic growth in the bedding and automotive space. Meanwhile, the company divested four small ventures in 2016, with annual revenues of nearly $100 million. All these actions position Leggett well toward achieving its goals for 2019.

Goals for 2019 Reflect Growth

In September 2016, Leggett chalked out its goals for 2019, aimed to help the company achieve its top-third TSR target in the following three years. These targets include revenues of about $4.75 billion, EBIT margin of 13.3%, EPS of $3.25 and a dividend of $1.70 per share. The company believes revenue growth, margin enhancement and shareholder-friendly moves like buybacks and dividend payments to be the main TSR drivers.

Further, the company expects these targets to be fueled by organic growth, which in turn is expected to be backed by strategic buyouts, with the absence of any non-recurring factors. Leggett is well on track with these goals and it intends to achieve volume growth through content gains, new products, enhanced market share and overall market advancement, in 2017.

Disciplined Capital Allocation Strategy

Leggett has always maintained a disciplined capital allocation strategy and remained focused on making investments to develop business, while using excess cash to enhance shareholder returns through dividend payouts and share buybacks. Going forward, Leggett anticipates continuing with its share repurchase program, having a standing authorization to buy back up to 10 million shares every year, after fulfilling all priority requirements. As for dividends, the company outlined the target dividend payout ratio to be 50-60% of its net earnings, in 2017.

Moreover, the company is rationalizing capital expenditures, including store-remerchandising efforts to improve return on investment. As a result, Leggett expects to generate substantial future cash flows. We believe that the company's strong liquidity position will continue to drive growth.

What's Wrong with the Stock?

Though the company seems poised for long-term growth, volatility in raw material prices, particularly steel, has been a threat to margins in recent quarters. This has been hurting the company's stock performance lately. Shares of Leggett declined 1.9% in the last three months, against the industry 's growth of 5.2%.

Evidently, Leggett's bottom-line and EBIT margins were hurt by raw material price inflation in third-quarter 2017. In fact, fluctuating steel prices impacted Leggett's performance throughout 2016.

Moreover, we believe the persistence of inflationary pressure remains a threat to Leggett's earnings in 2017. Leggett's results are likely to be adversely impacted in case of an increase in raw material prices. Consequently, the company narrowed earnings and sales guidance for 2017.

Looking for Some Trending Picks? Check These

Some better-ranked stocks in the same industry include American Woodmark Corporation AMWD , Bassett Furniture Industries Inc. BSET and Select Comfort Corporation SNBR , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

American Woodmark delivered positive earnings surprise of nearly 3% in the trailing four quarters. Moreover, the stock has surged 38.3% in the last three months.

Bassett Furniture has advanced 22% in the past year. Further, it has delivered a positive earnings surprise of 8.9% in the trailing four quarters.

Select Comfort has a long-term EPS growth rate of 18%. Further, the stock has returned 16.5% in the last three months.

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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.

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

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