Is Leggett & Platt a Buy Under $40?

Diversified manufacturer Leggett & Platt, Incorporated (LEG), in Los Angeles, manufactures and produces bedding, furniture, residential furnishings, and other various engineered components. A substantial increase in prices for raw materials, strategic acquisitions, and a return to normal seasonal levels of demand in Europe helped the company report record sales growth in the third quarter.

Its shares have soared 4.1% in price over the past five days. However, LEG’s stock is down 8.1% over the past month and 14.4% over the past three months to close its last trading session at $39.57.

Although LEG’s resilient business model and sales growth across diverse business segments bode well for the stock, several macroeconomic headwinds, including high raw material prices, elevated freight costs, and supply chain constraints, could be concerning. In addition, the company’s narrowed full-year 2021 guidance and declining volumes across all business segments could hamper its growth and hurt investor sentiment.

Here is what could influence LEG’s performance in the upcoming months:

Macro Headwinds

LEG continues to experience multiple macro challenges that have negatively impacted the company’s sales volume and EBIT in its last reported quarter. Its volume fell 6%, due mainly to supply chain constraints hampering the Bedding and Automotive markets. In addition, challenges related to foam chemical shortages and labor availability could hurt the company’s earnings and revenue. Furthermore, higher freight costs and raw material-related price increases due to rising inflation could threaten its growth in the near term.

Tepid Quarterly Performance

During the third quarter, ended November 1, 2021, LEG’s sales rose 9% year-over-year to $1.32 billion, driven by a 13% increase in trade sales in the Bedding Products segment and a 12% increase in the Furniture, Flooring & Textile Products segment. However, the company’s gross profit declined 5% from the prior-year quarter to $256.1 million, while its EBIT decreased 4%. Its net earnings fell 9% year-over-year to $97.2 million, while EPS declined 10% from the prior-year quarter to $0.71.

LEG’s net cash from operating activities came in at $50.1 million for the quarter, compared to $261.3 million for the same period last year. And its adjusted EBIT margin under Specialized Products segment fell 550 basis points year-over-year to 9.5%.

Discounted Valuation

LEG’s 9.46x forward EV/EBITDA ratio is 7.6% lower than the 10.24 industry average. And in terms of non-GAAP forward P/E, the company’s 14.44x compares with the 14.60 industry average. And its 1.05x forward Price/Sales is 11.1% higher than the 1.18x industry average.

POWR Ratings Reflect Uncertainty

LEG has an overall C rating, which translates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight distinct categories. LEG has a D grade for Growth. Analysts’ expectation that the stock’s EPS will decline 3.9% in the current quarter is in sync with the grade.

In terms of Sentiment grade, the company has a C. Also, LEG has a Momentum grade of C, which is consistent with its price returns over the past month.

In addition to the grades I have highlighted, one can check out additional LEG ratings for Quality, Stability, and Value here. LEG is ranked #49 of 61 stocks in the B-rated Home Improvement & Goods industry.

Bottom Line

While LEG witnessed 8% organic sales growth in the third quarter due to increased raw material selling prices, a significant fall in its volume and EBIT margin could hold back its growth as it continues to battle supply chain woes. Furthermore, rising costs driven by inflationary pressure could add more uncertainties to its path. Thus, we think investors should wait until the company better navigates the challenges.

How Does Leggett & Platt (LEG) Stack Up Against its Peers?

While LEG has an overall C (Neutral) rating in our proprietary rating system, one might want to check out its industry peers with A (Strong Buy) ratings: Acuity Brands, Inc. (AYI), Duluth Holdings Inc. (DLTH), and Masonite International Corporation (DOOR).

LEG shares were unchanged in premarket trading Monday. Year-to-date, LEG has declined -7.47%, versus a 27.55% rise in the benchmark S&P 500 index during the same period.

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.

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