Leggett & Platt (LEG) Stock Lacks Luster: What Lies Ahead?

Shares of Leggett & Platt, Incorporated (NYSE:LEG) declined nearly 7.5% since it reported dismal second-quarter 2017 results on Jul 27.

In fact, this Zacks Rank #4 (Sell) stock was down 2.1% in the last six months against the industry’s growth of 8.6%. Currently, the industry is placed at the top 21% of the Zacks classified industries (53 out of 256). Meanwhile, the broader Consumer Discretionary sector gained 7.5% and is placed at the top 38% (6 out of 16).

Let’s find out more about the stock, which exhibits a Momentum Score of “C”.

Concerns/Weaknesses

Leggett remains exposed to major volatility in raw material prices, with steel being one of the company’s key raw materials and its market being cyclical in nature. Evidently, the company’s bottom line and EBIT margins were hurt by steel price inflation in the second quarter. Also, the fluctuating steel prices affected Leggett’s performance throughout 2016.

Further, the company posted dismal second-quarter results with both its earnings and sales falling short of estimates. Also, the bottom line declined year over year. In fact, the earnings debacle could be attributable to raw material price inflation, which was more than offset benefits from higher sales and lower tax rate.

Nevertheless, sales grew year over year with organic sales gaining from solid volumes. The volumes growth was driven by robust performance at Automotive and Adjustable Beds, which are expected to remain growth drivers in 2017.

However, following the dismal quarter, management lowered its sales outlook for 2017 that resulted in tweaked earnings and EBIT views. Currently, earnings are anticipated in band of $2.55–$2.65 versus $2.55–$2.75, projected earlier.

This has also weighed upon the estimates that witnesses downward revisions in the last 30 days. The Zacks Consensus Estimate of $2.59 for 2017 and $2.81 for 2018 declined 1.5% and 1.4%, respectively. Also, estimates for the third quarter moved down to 70 cents per share from 73 cents.

Apart from this, Leggett is also susceptible to fluctuating metal margins as it is a manufacturer of steel rods. Additionally, currency headwinds, economic downturns and intense competition weigh upon the company’s performance.

Can the Tables Turn?

Leggett remains on track with its 2019 targets, which is somewhat reflected in its constant shareholder-friendly moves. These targets aim at aiding the company to achieve its top-third TSR target in the following three years.

Well, management believes revenue growth, margin enhancement and shareholder-friendly moves like buybacks and dividend payments to be the main TSR drivers. Furthermore, the company expects these targets to be fueled by organic growth backed by strategic buyouts.

Bottom Line

We expect Leggett’s future targets to produce results and offset the aforesaid headwinds but this might take time.

Meanwhile, you can count on better-ranked stocks that include Bassett Furniture Industries, Incorporated (NASDAQ:BSET) , Central Garden & Pet Company (NASDAQ:CENT) and Masonite International Corporation (NYSE:DOOR) .

Bassett Furniture Industries has delivered an average positive earnings surprise of 10.9% in the trailing four quarters, and currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Central Garden & Pet, a Zacks Rank #1 stock, has a long-term earnings growth rate of 10%.

Masonite International carries a Zacks Rank #2 (Buy) and has pulled off an average positive earnings surprise of 3.8% in the last four quarters

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