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Reasons to Stay Away from Leggett (LEG) Despite Outperformance
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Leggett & Platt, Inc.’s (LEG - Free Report) shares have been recovering and faring well compared with the industry since the beginning of 2022. In the year-to-date period, the stock has declined 14.4% compared with the Zacks Furniture industry’s 23.2% fall. LEG has been benefiting from raw material-related selling prices increase and bolt-on acquisitions.
However, it is witnessing soft volumes and currency headwinds across the business. In first-quarter 2022, adjusted EBIT and adjusted EBITDA margin contracted 70 basis points (bps) and 120 bps, thanks to higher raw material and transportation costs, production inefficiencies and related premium freight costs. Also, the management noted that supply chain constraints, inflation, tighter monetary policy, the invasion of Ukraine, and COVID lockdowns in China are likely to impact second-quarter performance.
Let’s discuss the factors impacting this Zacks Rank #4 (Sell) company.
Rising Inflation & Higher Costs: Consumers in the housing and related industry are increasingly concerned about rising inflation. Raw material, transportation and labor costs continue to hamper Leggett’s profitability. First-quarter adjusted earnings increased just 3.4% from the year-ago quarter.
This global furniture manufacturer expects 2022 earnings within $2.70-$3.00 per share and an EBIT margin in the 10.5-11% range. In 2021, it reported an adjusted EPS of $2.78 and an adjusted EBIT margin of 11.2%. The Zacks Consensus Estimate for 2022 earnings reflects a 1.1% year-over-year decline and the same for 2023 indicates a 1.7% rise. Earnings estimates for 2022 have moved 0.4% down in the past two months. This trend signifies bearish analyst sentiments.
Supply Chain Bottlenecks: Leggett has been witnessing supply chain disruptions, especially in chemicals, semiconductors, labor and transportation, which are constraining volume growth. For the first quarter, volume was down 4% year over year due to demand softness in U.S. and European bedding markets.
Market demand remains soft due to reduced consumer activity and elevated inventory levels across the industry. It expects mattress-related volume to be down mid-single digits in 2022. Volume for the Bedding Products segment as a whole is likely to be flat to down mid-single digits.
The Specialized Products unit also witnessed lower volume in Automotive, primarily due to the Russia-Ukraine ongoing conflict. In Aerospace, the industry is not anticipated to return to 2019 demand levels until 2024 due to these headwinds. In Hydraulic Cylinders, global supply chain constraints and labor availability hampered the ability of OEM customers to ramp up production.
The Furniture, Flooring & Textiles Products segment’s flooring products, textiles and home furniture business experienced lower volume. The Chinese market has also been impacted by COVID-related lockdowns.
Dependency on Housing Market: The furniture industry is directly related to the housing market. The housing industry is cyclical and affected by consumer confidence levels, prevailing economic conditions and interest rates. The federal government’s actions elated to economic stimulus, taxation and borrowing limits could affect consumer confidence and spending levels, which could hurt both the economy and the housing market.
The Federal Reserve expects to raise interest rates three times in 2022 as it makes its exit from policies enacted at the start of the health crisis. Interest rate hikes, soaring inflation and a smaller bond-buying program, are pointing to higher mortgage rates in 2022, thereby hitting the affordability of the prospective buyers. The softening housing demand may reflect on Leggett’s performance.
Leggett also remains vulnerable to other macroeconomic factors like unemployment, fluctuating interest rates and disposable income levels, among others.
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 based on 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.
Some Better-Ranked Stocks in the Consumer Discretionary Sector
Adtalem Global Education Inc. (ATGE - Free Report) : This Zacks Rank #1 company is focusing on innovation in product offerings, driving growth in Becker and providing a broad range of options for Association of Certified Anti-Money Laundering Specialists or ACAMS offerings. Adtalem has multiple courses to drive revenues that comprise tapping strong demand for Medical and Healthcare professionals, capitalizing on solid demand in the mortgage market and OnCourse Learning.
This company’s earnings for fiscal 2022 are expected to rise by 9.1%.
Lincoln Educational Services Corp. (LINC - Free Report) : Based in West Orange, NJ, this company provides career-oriented post-secondary education services to high school graduates and working adults in the United States. Improved operating performance at its campuses, consolidating facilities, a new welding program, a reinvigorated corporate partnership and changes in the admissions team have been favoring Lincoln.
Lincoln currently carries a Zacks Rank #2 (Buy). Although its earnings for 2022 are expected to decline 37.5%, the company surpassed analysts’ expectations in three of the last four quarters. LINC has a trailing four-quarter earnings surprise of 56.6%, on average.
Perdoceo Education Corp. (PRDO - Free Report) : This Zacks Rank #2 company has been benefiting from an improvement in enrollment trends at both of its segments — Colorado Technical University (CTU) and American InterContinental University (AIU). Apart from higher revenues, operating efficiencies at both CTU and AIU and the Trident acquisition bode well. The company’s focus on increased investments in technology and student-serving processes drives growth.
Although its earnings for 2022 are expected to decline 18.8%, the company surpassed analysts’ expectations in each of the last four quarters. PRDO has a trailing four-quarter earnings surprise of 13.1%, on average.
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Reasons to Stay Away from Leggett (LEG) Despite Outperformance
Leggett & Platt, Inc.’s (LEG - Free Report) shares have been recovering and faring well compared with the industry since the beginning of 2022. In the year-to-date period, the stock has declined 14.4% compared with the Zacks Furniture industry’s 23.2% fall. LEG has been benefiting from raw material-related selling prices increase and bolt-on acquisitions.
However, it is witnessing soft volumes and currency headwinds across the business. In first-quarter 2022, adjusted EBIT and adjusted EBITDA margin contracted 70 basis points (bps) and 120 bps, thanks to higher raw material and transportation costs, production inefficiencies and related premium freight costs. Also, the management noted that supply chain constraints, inflation, tighter monetary policy, the invasion of Ukraine, and COVID lockdowns in China are likely to impact second-quarter performance.
Let’s discuss the factors impacting this Zacks Rank #4 (Sell) company.
Image Source: Zacks Investment Research
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Factors Impacting Margins
Rising Inflation & Higher Costs: Consumers in the housing and related industry are increasingly concerned about rising inflation. Raw material, transportation and labor costs continue to hamper Leggett’s profitability. First-quarter adjusted earnings increased just 3.4% from the year-ago quarter.
This global furniture manufacturer expects 2022 earnings within $2.70-$3.00 per share and an EBIT margin in the 10.5-11% range. In 2021, it reported an adjusted EPS of $2.78 and an adjusted EBIT margin of 11.2%. The Zacks Consensus Estimate for 2022 earnings reflects a 1.1% year-over-year decline and the same for 2023 indicates a 1.7% rise. Earnings estimates for 2022 have moved 0.4% down in the past two months. This trend signifies bearish analyst sentiments.
Supply Chain Bottlenecks: Leggett has been witnessing supply chain disruptions, especially in chemicals, semiconductors, labor and transportation, which are constraining volume growth. For the first quarter, volume was down 4% year over year due to demand softness in U.S. and European bedding markets.
Market demand remains soft due to reduced consumer activity and elevated inventory levels across the industry. It expects mattress-related volume to be down mid-single digits in 2022. Volume for the Bedding Products segment as a whole is likely to be flat to down mid-single digits.
The Specialized Products unit also witnessed lower volume in Automotive, primarily due to the Russia-Ukraine ongoing conflict. In Aerospace, the industry is not anticipated to return to 2019 demand levels until 2024 due to these headwinds. In Hydraulic Cylinders, global supply chain constraints and labor availability hampered the ability of OEM customers to ramp up production.
The Furniture, Flooring & Textiles Products segment’s flooring products, textiles and home furniture business experienced lower volume. The Chinese market has also been impacted by COVID-related lockdowns.
Dependency on Housing Market: The furniture industry is directly related to the housing market. The housing industry is cyclical and affected by consumer confidence levels, prevailing economic conditions and interest rates. The federal government’s actions elated to economic stimulus, taxation and borrowing limits could affect consumer confidence and spending levels, which could hurt both the economy and the housing market.
The Federal Reserve expects to raise interest rates three times in 2022 as it makes its exit from policies enacted at the start of the health crisis. Interest rate hikes, soaring inflation and a smaller bond-buying program, are pointing to higher mortgage rates in 2022, thereby hitting the affordability of the prospective buyers. The softening housing demand may reflect on Leggett’s performance.
Leggett also remains vulnerable to other macroeconomic factors like unemployment, fluctuating interest rates and disposable income levels, among others.
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 based on 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.
Some Better-Ranked Stocks in the Consumer Discretionary Sector
Adtalem Global Education Inc. (ATGE - Free Report) : This Zacks Rank #1 company is focusing on innovation in product offerings, driving growth in Becker and providing a broad range of options for Association of Certified Anti-Money Laundering Specialists or ACAMS offerings. Adtalem has multiple courses to drive revenues that comprise tapping strong demand for Medical and Healthcare professionals, capitalizing on solid demand in the mortgage market and OnCourse Learning.
This company’s earnings for fiscal 2022 are expected to rise by 9.1%.
Lincoln Educational Services Corp. (LINC - Free Report) : Based in West Orange, NJ, this company provides career-oriented post-secondary education services to high school graduates and working adults in the United States. Improved operating performance at its campuses, consolidating facilities, a new welding program, a reinvigorated corporate partnership and changes in the admissions team have been favoring Lincoln.
Lincoln currently carries a Zacks Rank #2 (Buy). Although its earnings for 2022 are expected to decline 37.5%, the company surpassed analysts’ expectations in three of the last four quarters. LINC has a trailing four-quarter earnings surprise of 56.6%, on average.
Perdoceo Education Corp. (PRDO - Free Report) : This Zacks Rank #2 company has been benefiting from an improvement in enrollment trends at both of its segments — Colorado Technical University (CTU) and American InterContinental University (AIU). Apart from higher revenues, operating efficiencies at both CTU and AIU and the Trident acquisition bode well. The company’s focus on increased investments in technology and student-serving processes drives growth.
Although its earnings for 2022 are expected to decline 18.8%, the company surpassed analysts’ expectations in each of the last four quarters. PRDO has a trailing four-quarter earnings surprise of 13.1%, on average.