We are reiterating our long-term ‘Neutral’ recommendation on Leggett & Platt, Incorporated (LEG) with a target price of $26.00 per share.
Leggett and Platt is a leading manufacturer of components for residential and office furniture, carpet underlay, drawn steel wire and automotive seat support and lumbar systems in North America. Moreover, the company has a well-diversified customer base and solid research and development (R&D) capabilities. This offers a competitive edge to the company and strengthens its pricing power in the market.
Leggett is anticipating a steady revival in the U.S. economy that should spark sales of $3.4 billion to $3.6 billion for fiscal 2011. In spite of significant reduction in its fixed cost structure over the last three years, the company has retained its additional production capacity. Hence, Leggett does not need to make any large capital investment to accommodate the projected sales.
Moreover, Leggett has taken strategic steps to optimize its capital allocation and concentrate on core business activities. In such an effort, the company divested underperforming business units between 2007 and 2010, including Storage Products, Coated Fabrics, Aluminum Products, Wood Products and Fibers, Plastics, the dealer portion of Commercial Vehicle Products, and Prime Foam Products.
Furthermore, the company has a consistent track record of returning cash to shareholders in the form of regular dividends. During 2008, 2009 and 2010, Leggett utilized cash reserves of $165 million, $157 million and $155 million, respectively, toward dividend payments.
On the flip side, 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. Moreover, higher raw material prices have prompted some of Leggett’s customers to prefer lower cost components over higher cost ones, thereby adversely affecting margins. Such a persisting trend is likely to affect the company’s operating performance.
Further, the company faces intense competition from its rivals, such as Flexsteel Industries Inc. (FLXS) and Genuine Parts Company (GPC). Leggett & Platt also encounters competition from local and regional players in the respective countries of operation. This places the company under severe stress to maintain profitability.
Also, Leggett’s significant international presence exposes it to unfavorable foreign currency translations. Doing business in foreign countries may have a substantial effect on Leggett’s operations and financial performance, as almost 25% of the company’s revenue is generated from its operations abroad.
Leggett and Platt holds a Zacks#3 Rank, which translates into a short-term Hold recommendation.
GENUINE PARTS (GPC): Free Stock Analysis Report
LEGGETT & PLATT (LEG): Free Stock Analysis Report
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