By Sam Boughedda
Leggett & Platt (NYSE:LEG) was downgraded to Underweight from Neutral, with the price target on the stock lowered to $24 from $31 per share by Piper Sandler analysts on Monday.
The analysts stated the downgrade was "due to (1) Normalization of LEG's metal margin negatively impacting EPS by ~($0.50); and (2) Continued share loss in Bedding segment sales w/ Springs & Specialty Foam (Bedding is ~46% of LEG sales & EBIT)."
"The price between steel scrap (what LEG buys) and steel rod (what LEG makes) has widened over the last two years. This enhanced metal margin has provided LEG with an EBIT benefit (by our estimation) of ~$85M (or +$0.48 in EPS) since 2020. We expect the metal margin to compress back to "normal" (back to 2020 levels) resulting in EPS pressure of ~($0.50) over the next two years (w/ potential for the majority of pressure in 2023)," wrote the analysts.
They added that the company's historically dominant share with innerspring manufacturing has seen erosion over the last two years after LEG couldn't supply sufficient fabric-encased springs to the industry in 2H 2020.
"This not only caused large customers (such as Sealy, Serta, and Simmons) to permanently diversify their spring supply, but also has caused an abundance of new spring manufacturing to pop up in North America (spring imports from Europe have also increased). With increased spring manufacturing capacity in the US (and increased imports), we expect pricing pressure and share loss for LEG in the future," the analysts added.
"We believe these two factors will significantly pressure EPS over the next two years, so we lower our 2023 and 2024 EPS to $1.98 and $1.70 (vs. consensus of $2.22 and $2.50, respectively). For valuation, we don't expect LEG shares to trade <12x EPS, but we lower our PT multiple assumption to 12x due to declining EPS."