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Leggett & Platt (NYSE:LEG) Surprises With Q4 Sales But Stock Drops


Full Report / February 08, 2024

Manufacturing company Leggett & Platt (NYSE:LEG) reported Q4 FY2023 results beating Wall Street analysts' expectations, with revenue down 6.7% year on year to $1.12 billion. On the other hand, the company's full-year revenue guidance of $4.5 billion at the midpoint came in 3.9% below analysts' estimates. It made a non-GAAP profit of $0.26 per share, down from its profit of $0.39 per share in the same quarter last year.

Leggett & Platt (LEG) Q4 FY2023 Highlights:

  • Revenue: $1.12 billion vs analyst estimates of $1.11 billion (0.8% beat)
  • EPS (non-GAAP): $0.26 vs analyst expectations of $0.27 (3.7% miss)
  • Management's revenue guidance for the upcoming financial year 2024 is $4.5 billion at the midpoint, missing analyst estimates by 3.9% and implying -4.8% growth (vs -8.2% in FY2023)
  • Free Cash Flow of $122.7 million, similar to the previous quarter
  • Gross Margin (GAAP): 17.9%, up from 17.6% in the same quarter last year
  • Market Capitalization: $3.09 billion

Founded in 1883, Leggett & Platt (NYSE:LEG) is a diversified manufacturer making products for various industries.

The company started as a producer of bedding components and has since expanded into numerous other sectors. Leggett & Platt's business is divided into several segments, including Bedding, Specialized Products, and Furniture, Flooring & Textile (FF&T). This diversification strategy has enabled the company to maintain stability.

In the Bedding Products segment, Leggett & Platt is a leading manufacturer of components used in the production of mattresses, such as innerspring mattresses and foundations. The company has numerous patents and industry-firsts that have shaped the way mattresses are made and experienced.

The Specialized Products segment focuses on producing components for automobiles, such as lumbar support systems and seat suspension systems.

Leggett & Platt's Furniture, Flooring & Textile Products segment includes the production of components used in the manufacturing of upholstered furniture, such as recliner mechanisms and sofa sleeper mechanisms. Additionally, this segment produces carpet cushions and hard surface flooring underlayment for residential and commercial markets.

Home Furnishings

A healthy housing market is good for furniture demand as more consumers are buying, renting, moving, and renovating. On the other hand, periods of economic weakness or high interest rates discourage home sales and can squelch demand. In addition, home furnishing companies must contend with shifting consumer preferences such as the growing propensity to buy goods online, including big things like mattresses and sofas that were once thought to be immune from e-commerce competition.

Leggett & Platt's primary competitors include Tempur Sealy (NYSE:TPX), Serta Simmons Bedding, Herman Miller (NASDAQ:MLHR), Flexsteel Industries (NASDAQ:FLXS), and private companies L&P Aerospace and Precision Fabrics.

Sales Growth

Reviewing a company's long-term performance can reveal insights into its business quality. Any business can have short-term success, but a top-tier one sustains growth for years. Leggett & Platt's annualized revenue growth rate of 2% over the last 5 years was weak for a consumer discretionary business. Leggett & Platt Total RevenueWithin consumer discretionary, a long-term historical view may miss a company riding a successful new product or emerging trend. That's why we also follow short-term performance. Leggett & Platt's recent history shows a reversal from its already weak 5-year trend, as its revenue has shown annualized declines of 3.5% over the last 2 years.

We can dig even further into the company's revenue dynamics by analyzing its three largest segments: Bedding, FF&T, and Specialized Products, which are 40.2%, 31.2%, and 28.6% of revenue. Over the last 2 years, Leggett & Platt's Bedding (mattresses, foundations) and FF&T (sofa parts, tiles ) revenues averaged year-on-year declines of 9.9% and 3.8% while Specialized Products (automobile components) averaged 13.4% growth.

This quarter, Leggett & Platt's revenue fell 6.7% year on year to $1.12 billion but beat Wall Street's estimates by 0.8%. Looking ahead, Wall Street expects revenue to decline 1.2% over the next 12 months.

Operating Margin

Operating margin is a key measure of profitability. Think of it as net income–the bottom line–excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Leggett & Platt was profitable over the last two years but held back by its large expense base. Its average operating margin of 3.4% has been paltry for a consumer discretionary business.

Leggett & Platt Operating Margin (GAAP)

This quarter, Leggett & Platt generated an operating profit margin of negative 32.9%, down 40.5 percentage points year on year. This reduction stemmed from a one-time $444 million impairment charge in its Bedding Products segment. Its adjusted operating margin, which excludes the charge, was 6%.

Over the next 12 months, Wall Street expects Leggett & Platt to become profitable. Analysts are expecting the company’s LTM operating margin of negative 1.9% to rise to positive 7.1%.

EPS

Analyzing long-term revenue trends tells us about a company's historical growth, but the long-term change in its earnings per share (EPS) points to the profitability and efficiency of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions. Leggett & Platt EPS (Adjusted)

Over the last 5 years, Leggett & Platt's EPS dropped 44.1%, translating into 11% annualized declines. We tend to steer our readers away from companies with falling EPS, especially in the consumer discretionary sector, where diminishing earnings could imply changing secular trends or consumer preferences. If there's no earnings growth, it's difficult to build confidence in a business's underlying fundamentals, leaving a low margin of safety around the company's valuation (making the stock susceptible to large downward swings).

In Q4, Leggett & Platt reported EPS at $0.26, down from $0.39 in the same quarter a year ago. This print unfortunately missed analysts' estimates, but we care more about long-term EPS growth rather than short-term movements. Over the next 12 months, Wall Street expects Leggett & Platt to perform poorly. Analysts are projecting its LTM EPS of $1.39 to shrink by 2.8% to $1.35.

Cash Is King

If you've followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills.

Over the last two years, Leggett & Platt has shown mediocre cash profitability, putting it in a pinch as it gives the company limited opportunities to reinvest, pay down debt, or return capital to shareholders. Its free cash flow margin has averaged 7.5%, subpar for a consumer discretionary business.

Leggett & Platt Free Cash Flow Margin

Leggett & Platt's free cash flow came in at $122.7 million in Q4, equivalent to a 11% margin, down 42.2% year on year.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to how much money the business raised (debt and equity).

Leggett & Platt's five-year average return on invested capital was 10.1%, somewhat low compared to the best consumer discretionary companies that pump out 25%+. Its returns suggest it historically did a subpar job investing in profitable business initiatives.

The trend in its ROIC, however, is often what surprises the market and drives the stock price. Unfortunately, over the last two years, Leggett & Platt's ROIC has averaged a 7.6 percentage point decrease each year. In conjunction with its already low returns, these declines suggest the company's profitable business opportunities are few and far between.

Key Takeaways from Leggett & Platt's Q4 Results

It was encouraging to see Leggett & Platt narrowly top analysts' revenue expectations this quarter. On the other hand, its full-year 2024 revenue and EPS guidance missed analysts' expectations due to ongoing weakness in its Bedding Products and FF&T segments. Management also projects sales volumes to decline in the low to mid-single digits. Lastly, on January 16, 2024, the company announced a restructuring plan primarily impacting its Bedding Products segment. Overall, the results could have been better. The company is down 5% on the results and currently trades at $22.1 per share.

Is Now The Time?

Leggett & Platt may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We cheer for all companies serving consumers, but in the case of Leggett & Platt, we'll be cheering from the sidelines. Its revenue growth has been weak over the last five years, and analysts expect growth to deteriorate from here. On top of that, its declining EPS over the last five years makes it hard to trust, and its declining ROIC shows its profitable business opportunities are shrinking.

Leggett & Platt's price-to-earnings ratio based on the next 12 months is 17.2x. While we've no doubt one can find things to like about Leggett & Platt, we think there are better opportunities elsewhere in the market. We don't see many reasons to get involved at the moment.

Wall Street analysts covering the company had a one-year price target of $23 per share right before these results (compared to the current share price of $22.10).

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