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Leggett Slips on Yet Another View Cut, More Downside Ahead?

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Steel price volatility seems to be taking a toll on Leggett & Platt Incorporated (LEG - Free Report) , as the company cut its 2017 outlook for the second time in less than two months. Clearly, this toned down investors’ sentiment as evident from the 3.5% fall in Leggett’s shares in Sep 6 after-market trading session. Well, unstable steel prices have long been a hindrance for Leggett, which has tumbled 8.1% in the past year, compared with the industry’s 2.6% dip.



Concurrently, the company also announced the divestiture of Masterack business, which was the remaining part of its Commercial Vehicle Products (CVP) Group. Notably, the sale is expected to benefit Leggett’s bottom line by 4 cents in 2017. So, let’s delve deeper into yesterday’s announcements and see how it impacts the Zacks Rank #3 (Hold) stock.

Second View Cut in Less than 2 Months — What does it Indicate?

Leggett trimmed its 2017 forecasts, owing to increased steel price inflation, an expected consequential rise in LIFO costs and soft demand in the furniture and bedding space. The company now envisions adjusted earnings per share in a band of $2.40-$2.50, down from the previously guided range of $2.55-$2.65. Including the 4 cents impact from CVP’s sale, earnings are expected to be in a band of $2.44-$2.54.   

While sales are still anticipated to range from $3.9-$4 billion, the company lowered its full-year EBIT margin expectations to 12%. Earlier, management projected EBIT margin to lie between 12.5% and 13%. Finally, Leggett envisions operating cash flow to be roughly $425 million, compared with the prior outlook of over $450 million.

Well, this marks Leggett’s second view cut in little over a month time span. Evidently, steel price woes had compelled the company to curtail fiscal 2017 earnings and EBIT margin views, when it reported dismal second-quarter results on Jul 27.  Both the top and bottom line fell short of the Zacks Consensus Estimate and the latter also plunged year over year. Incidentally, Leggett has missed sales estimates in eight of the last nine quarters, while earnings have been lower-than-expected in two out of the past three quarters. Given the dismal surprise history and back-to-back view cuts, tough times seem to be ahead for Leggett.

Sale of CVP to be Accretive to 2017 EPS

Concurrently, management revealed that it divested its last CVP Group business — Masterack, on Aug 4. This unit is engaged in the production of aluminum, steel and composite van racking, storage systems and shelving for commercial work trucks. The deal led to a pre-tax loss of $3 million, which was compensated by a tax gain of $8 million. Overall, this divestiture is likely to augment 2017 earnings per share by 4 cents.

Well, Leggett divested its first CVP unit in 2015 and sold another small CVP unit in 2016, after which it held the remaining operations for sale.

The CVP Group formed part of Leggett’s Specialized Products segment that witnessed a 1.3% rise in sales in the second quarter. Though strong Automotive volumes fueled sales, the 2016 divestiture of CVP units and unfavorable currency translations were constraints. While these obstacles could pose threats to Leggett’s top line, the renewed steel price inflation is likely to boost the same. Evidently, Leggett’s second-quarter sales were augmented by higher volumes and raw material price inflation.

The Bottom Line

All said, it remains to be seen whether yesterday’s decline was just a one-time incident or is the furniture big-wig up for further downside. Until then, investors can count on some better-ranked stocks, which appear promising.

3 Retail Stocks in the Spotlight

Lumber Liquidators Holdings Inc. (LL - Free Report) , with a long-term EPS growth rate of 27.5%, carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Five Below Inc. (FIVE - Free Report) with a Zacks Rank #2, possesses a splendid earnings surprise history. The stock has a long-term growth rate of 28.5%.

Ross Stores Inc. (ROST - Free Report) with a long-term growth rate of 10.4%, has delivered earnings surprises consistently in the past four quarters. Well, this discount store retailer carries a Zacks Rank #2.

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