Still Neutral on Leggett

We maintain our long-term Neutral recommendation on Leggett & Platt Inc. (LEG - Analyst Report), the manufacturer of diversified engineered products and components, with a target price of $21 per share.

Our recommendation is mainly based on the company’s raised fiscal 2012 expectations, its strategy to optimize capital allocation and increased focus on core businesses that bodes well for future operating performance. However, these were offset by the scenario of intense competition from global and regional players, volatility in raw material prices and exposure to adverse foreign currency translations.

Leggett’s first-quarter 2012 earnings came in flat versus the year-ago quarter at 30 cents per share, benefiting from improved sales, but were offset by a higher tax rate. The company’s quarterly earnings also missed the Zacks Consensus Estimate by a couple of cents. However, total sales climbed 5.7%, primarily driven by the acquisition of Western Pneumatic Tube and increased same-location sales.

Anticipating a modest economic recovery, the company raised its fiscal 2012 earnings projection to a range of$1.25-$1.45 per share from $1.20-$1.40 guided earlier. The company also raised its sales forecast for fiscal 2012 in the range of $3.65-$3.85 billion instead of $3.60-$3.80 billion anticipated earlier.

Leggett is in the midst of its three-part strategic plan announced in November 2007. The company has successfully completed the first two-part of its strategic plan, including divesting low performing businesses and reviving the company’s margins and returns. Moving into the third stage, the company now expects to achieve an annual growth rate of 4% to 5%.

We believe Leggett has significant operating leverage to accomplish its third part of strategic plan as the company has a considerable amount of retained spare production to meet the demand of $4 billion. Hence, the company will not require any large capital investment.

Further, the Missouri-based manufacturer of components of residential and office furniture, carpet underlay, drawn steel wire and automotive seat support and lumbar systems is continually enhancing its core business operations while improving its financial flexibility. Leggett is continuously taking strategic actions to add new products to its portfolio as per the consumers changing preferences and simultaneously divesting the low performing businesses.

Additionally, Leggett has a well-diversified customer base and solid research and development (R&D) capabilities, offering a competitive edge while strengthening its pricing power in the market.

On the flip side, Leggett operates in a highly competitive industry, and thus may find it difficult to execute and implement new business strategies, which in turn, will impact its operations adversely. The company faces stiff competition from its rivals, such as Flexsteel Industries Inc. (FLXS), Genuine Parts Company (GPC - Analyst Report) and Steelcase Inc. (SCS - Snapshot Report). Furthermore, Leggett and Platt also face competition from local and regional players in the respective countries.

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. A continuation of this trend is likely to affect the company’s operating performance.

Leggett currently retains a Zacks #3 Rank, which translates to a short-term Hold rating.