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Why Investors Should Get Rid of Leggett (LEG) Stock Now

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Leggett & Platt, Incorporated’s (LEG - Free Report) shares declined almost 8% on Dec 17. Investors’ sentiment might have been hurt by lower earnings and revenue projection for 2021. Leggett has been experiencing supply chain issues related to semiconductor and foam chemical shortages. Also, labor constraints, freight challenges and higher costs are pressing concerns. Owing to higher raw material-related price increases and lower expected volume in Automotive, Leggett narrowed its 2021 earnings projection during the third-quarter earnings call.

This global furniture manufacturer missed third-quarter earnings estimates by 6.6%. Also, the metric declined 13.4% on a year-over-year basis due to lower EBIT and a higher tax rate.

In the year-to-date period, the stock declined 11.1% against the Zacks Furniture industry’s 10.5% rally. On a further discouraging note, earnings estimates for 2022 have declined 2.6% in the past two months. This trend signifies bearish analyst sentiments and justifies the company’s Zacks Rank #4 (Sell), indicating continued supply-related challenges and inflationary pressure in the near term.

Zacks Investment ResearchImage Source: Zacks Investment Research

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Factors Impacting Margins

Tepid View: Leggett has updated its full-year guidance owing to raw material-related price increase and lower expected volume in Automotive. The company now expects adjusted EPS between $2.70 and $2.80 (compared with $2.70 and $2.90 projected earlier). LEG expects adjusted EBIT margin between 11.1% and 11.2% compared with prior anticipation of 11.4-11.6%. In 2020, adjusted EPS and adjusted EBIT margin were $2.13 per share and 10.4%, respectively.

For the fourth quarter, it expects net sales within $1.26-$1.36 billion and earnings of 69-79 cents per share. In the year-ago period, net sales were $1.182 billion and earnings came in at 76 cents per share.

Rising Inflation & Higher Expenses: Consumers in the overall housing and related industry are increasingly concerned about rising inflation as the economy is recovering from the pandemic. Market pundits expect inflation to outpace income growth in the near term. The industry players are distressed by rising raw material prices, logistic expenses and labor costs. Leggett has been witnessing supply chain disruptions, especially in chemicals, semiconductors, labor and transportation, which are constraining volume growth. For the third quarter, a volume decline of 6% year over year due to supply chain constraints in Bedding and Automotive markets offset the positives.

Stiff Competition: The furniture industry is highly competitive, with home furnishing retailers, department stores and antique dealers giving a hard time. Leggett faces intense competition from local and regional players in the countries where it operates on the basis of product quality, pricing, innovation and customer service. Being in such a highly competitive industry, Leggett may find it difficult to execute and implement new business strategies, which, in turn, will adversely impact operations.

Dependency on Housing Market & Other Macroeconomic Factors: The furniture industry is directly related to the housing market. Any uncertain conditions in the housing market may reflect on Leggett’s performance. Leggett caters to various other industries, which makes its business susceptible to several economic downturns. The company’s performance is heavily dependent on industry demand, which, in turn, is affected by consumer behavior. Also, it remains vulnerable to other macroeconomic factors like unemployment, fluctuating interest rates and disposable income levels, among others.

Few Better-Ranked Stocks in the Consumer Discretionary Sector

WillScot Mobile Mini Holdings Corp. (WSC - Free Report) : This Phoenix, AZ-based company provides modular space and portable storage solutions. Increased core leasing revenues in the NA Modular segment, the addition of Mobile Mini's revenues and higher deliveries of all four products across most end markets served by the company have been driving its performance.

This Zacks Rank #2 (Buy) stock has gained 71.5% in the year-to-date period. The company has an expected earnings growth rate of 95.1% and 54.1% for 2021 and 2022, respectively.

La-Z-Boy Incorporated (LZB - Free Report) : Based in Monroe, MI, this company manufactures, markets, imports, exports, distributes, and retails upholstery furniture products, accessories, and casegoods furniture products. The company has been benefiting from strong demand trends across all business units. Further, its solid cash position and investment in business bode well. The company has been navigating well through challenges like escalating commodity and freight costs.

This Zacks Rank #2 company’s earnings are expected to grow 43.5% in fiscal 2022. Its shares have dropped 8.6% in the year-to-date period.

Stride, Inc. (LRN - Free Report) : Headquartered in Herndon, VA, this technology-based education company has been gaining from higher enrollment and cost-saving efforts. Consistent demand for online learning options has been benefiting Stride’s top line in recent times. Investments focused on improving user experience, enhancing teacher tools and strengthening student engagement also bode well.

Stride currently carries a Zacks Rank #2. The stock has gained 50% in the year-to-date period compared with the Zacks School industry’s 72.2%. The company’s earnings for fiscal 2022 are expected to grow 19.9%.