A month has gone by since the last earnings report for Legget & Platt (LEG - Free Report) . Shares have added about 1.6% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Legget & Platt due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Leggett’s Q4 Earnings & Revenues Top Estimates, Up Y/Y
Leggett & Platt Inc. reported better-than-expected results in the fourth quarter of 2018, wherein earnings and revenues surpassed the Zacks Consensus Estimate. Adjusted earnings of 62 cents per share surpassed the consensus estimate of 57 cents by 8.8%. Also, the said figure increased 5% from the year-ago level of 59 cents. The positive performance was backed by advanced metal margins at its steel rod mill.
The company’s net sales of $1,046.7 million surpassed the consensus mark of $1,024 million by 2.2%. The said figure also increased 6% from the prior-year level of $984.5 million. The uptrend was primarily driven by new programs and added content in Automotive, market share and content gains in Bedding, strength in Adjustable Bed, along with material price increase. Aerospace and Work Furniture also added to the positives.
The improved sales were also driven by a 3% gain, owing to raw material price inflation. Furthermore, acquisitions (net of divestures) added 3% to the company’s sales.
Gross profit was up 2% year over year to $213.2 million in the quarter. However, gross margin contracted 80 basis points (bps) to 20.4%.
Nonetheless, adjusted EBIT grew 6.8% from the prior-year quarter to $120 million. Also, adjusted EBIT margin of 11.5% increased 10 bps from the prior-year figure of 11.4%. Adjusted EBITDA also increased 7.8% from the year-ago quarter to $155.1 million. The improved margins resulted from better execution of initiatives that emphasizes on growing strong businesses and exiting or restructuring those that are struggling.
Net sales in Residential Products (excluding inter-segment sales) increased 6.6% from the year-ago quarter to $420.3 million. The upside was driven by a 5% improvement in same location sales along with 1% contribution from acquisitions. Also, raw material price inflation contributed 6% to sales growth, partially offset by currency headwinds. Volume remained flat due to lower sales in Flooring Products.
Including inter-segment sales, total sales in the segment rose 6.3% from a year ago to $424.7 million.
The Industrial Products segment's sales improved 22.5% from the prior-year level to $91.6 million. Total sales, including inter-segment revenues, were up 22.1% from the year-ago period to $166.1 million, mainly driven by 24% raw material price inflation. However, this was partially offset by 2% declined volume.
Net sales at Furniture Products decreased 1.8% from the year-ago figure to $275.3 million on 2% lower volumes. Benefits from higher Adjustable Bed and Work Furniture volumes were more than offset by declines in Home Furniture and Fashion Bed. Nevertheless, raw material price increases, net of currency impact, added 1% to sales. Total sales of the segment (including inter-segment sales) fell 1.4% year over year to $278.7 million.
The Specialized Products segment's sales rose 10.5% from the prior-year figure to $259.5 million on the back of Precision Hydraulic Cylinders (“PHC”) acquisition. Same location sales remained flat on a year-over-year basis, while Automotive and Aerospace volumes grew 3%, partially offset by a 3% unfavorable currency impact. Total sales of the segment (including inter-segment sales) grew 10% from the year-ago level to $260.2 million.
Leggett ended fourth quarter with cash and cash equivalents of $268.1 million, and long-term debt of $1,167.8 million. Furthermore, the company generated $189.2 million cash flow from operations in the quarter. Leggett’s debt was 1.9 times of the trailing 12-month adjusted EBITDA.
Meanwhile, in 2018, the company repurchased 2.6 million shares for average price of $43.10, and issued 1.2 million shares through employee benefit plans as well as option exercises.
Full-Year 2018 Highlights
Leggett’s full-year 2018 adjusted earnings of $2.48 per share and net sales of $4.27 billion surpassed the Zacks Consensus Estimate of $2.44 and $4.25 billion, respectively. Additionally, both the top and bottom lines increased 8% and 1%, respectively, on a year-over-year basis.
The top-line performance was backed by a 6% increase in same location sales, along with 3% growth in volumes, and raw material price increases and currency, each. Acquisitions, net of divestitures, added 2% to sales growth. However, adjusted EBIT margin contracted 80 bps to 11.1%.
Following the quarterly results, management issued upbeat guidance for 2019. Sales are projected at approximately $4.95-$5.1 billion, reflecting an increase of 16-19% from the 2018 level. Additionally, same location sales growth is expected within 0-3%.
Depreciation and amortization in 2019 are expected to be approximately $210 million, and net interest is projected at about $95 million. Notably, the guidance considers an effective tax rate of 24%.
On the basis of slightly higher organic sales and moderating steel inflation, adjusted earnings are likely to be in the range of $2.45-$2.65 per share. Adjusted EBIT margin is envisioned to be nearly 10.8-11.2%.
For 2019, Leggett expects operating cash flow from operations of about $550 million. Capital expenditure for the year is projected at $195 million and dividend payouts are expected to be $205 million. Furthermore, it expects payout for 2019 to be above the target of nearly 50%.
Elite Comfort Solutions (“ECS”) Acquisition
On Jan 16, 2019, Leggett completed the acquisition of ECS, a leading proprietary specialized foam technology, specifically for the bedding and furniture industries. The transaction amounted to $1.25 billion in cash.
The company expects ECS to generate double-digit sales growth of approximately $675 million in 2019. However, it anticipates the purchase accounting impacts to hamper EBIT margins in 2019. Nevertheless, ECS is likely to be accretive to earnings in early 2020.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
At this time, Legget & Platt has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Legget & Platt has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.