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Analyst Blog

Leggett & Platt Inc. (LEG - Analyst Report), the manufacturer of diverse engineered products and components, remains on our Neutral list with a price target of $31.00 per share.

Why Reiterate?

We commend Leggett’s consistent endeavors to keep itself on the growth trajectory through acquisitions that would help it augment its top-line performance.

A well-diversified customer base, pricing power and solid research and development (R&D) capabilities facilitate Leggett & Platt to keep itself afloat in the soft economic environment. In order to increase its focus on core business operations and improve financial flexibility, the company is continuously taking strategic action to add new products to its portfolio as per the consumers’ changing preferences while simultaneously divesting low-performing businesses.

Further, we remain impressed by the company’s strong financial base, which enables it to make profitable ventures as well as return value to shareholders. We believe that the company’s sustained focus on adding new products while simultaneously divesting low-performing businesses bode well for future growth.

Owing to its strategic endeavors, the company, which competes with American Woodmark Corp. (AMWD - Snapshot Report), recently reported better-than-expected quarterly results with sales and earnings of $896.8 million and 35 cents per share, respectively, which was better than the year-ago comparable quarter figure as well as the Zacks Consensus Estimate.

However, we are concerned about rising raw material costs, which have adversely impacted the company’s margins over the past few quarters. Leggett’s operating performance is greatly dependent on the price of raw materials, particularly steel.

Global steel markets are cyclical in nature and the price of steel has witnessed extreme volatility in the recent years, leading to significant fluctuations in the company’s margins. During the fourth quarter, the company witnessed a 230-bps year-over-year contraction in its gross margin. A continuation of this trend could weigh on the company’s operating performance.

Moreover, intense competition from global and regional players as well as exposure to foreign exchange rates may undermine the company’s performance going forward.

Given the pros and cons in the stock, we prefer to remain on the sidelines and thereby maintain our Neutral recommendation.

Other Stocks to Consider

Leggett currently has a Zacks Rank #3 (Hold). Some better-performing stocks in the consumer discretionary sector include Hooker Furniture Corp. (HOFT - Snapshot Report) and Virco Mfg. Corp. (VIRC). While Hooker Furniture carries Zacks Rank #1 (Strong Buy), Virco Mfg has a Zacks Rank #2 (Buy).

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