What a brutal six months it’s been for Leggett & Platt. The stock has dropped 22.4% and now trades at $9.30, rattling many shareholders. This may have investors wondering how to approach the situation.
Is now the time to buy Leggett & Platt, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Leggett & Platt Will Underperform?
Despite the more favorable entry price, we're swiping left on Leggett & Platt for now. Here are three reasons why we avoid LEG and a stock we'd rather own.
1. Revenue Spiraling Downwards
A company’s long-term performance is an indicator of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Leggett & Platt struggled to consistently generate demand over the last five years as its sales dropped at a 1.5% annual rate. This wasn’t a great result and signals it’s a low quality business. 
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Leggett & Platt, its EPS declined by 15.7% annually over the last five years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Leggett & Platt’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Leggett & Platt falls short of our quality standards. Following the recent decline, the stock trades at 8.4× forward P/E (or $9.30 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now. We’d suggest looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
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