On Dec 23, 2014, Zacks Investment Research upgraded Leggett & Platt Inc. (LEG), the manufacturer of diversified engineered products, to a Zacks Rank #1 (Strong Buy).
Why the Upgrade?
Leggett has been gaining traction on the back of its long-term strategic initiatives focused on boosting its top line and policy of streamlining its business portfolio through acquisitions and divestitures. Its strong financial base and sturdy quarterly performances also position it well. Over the long-term, the company expects to attain sales growth of 4%–5% annually.
We commend Leggett’s consistent endeavors to keep itself on the growth trajectory through acquisitions that would eventually augment its top-line performance. In order to enhance core business operations and improve financial flexibility, Leggett has been persistently taking strategic actions to add new products to its portfolio in order to satisfy the changing preferences of consumers, while simultaneously divesting low-performing businesses.
Some of the steps taken by Leggett during the last year to enhance its business portfolio include the acquisition of three U.S. innerspring component production facilities of Tempur Sealy, investment in machinery to support the significant growth seen in Comfort Core innersprings, expansion in China to sustain rapid growth of its automotive business and a small acquisition of a German motion furniture hardware designer in the third quarter.
On the other hand, the company recently divested a major chunk of its Store Fixtures operations, which has not been performing up to the mark for quite some time. The unit, which formed a part of Leggett’s Commercial Fixturing & Components segment, was sold to Lozier Corporation for roughly $62 million. The company had been considering this sale for a long time.
We are also impressed by the company’s strong financial base that enables it to make profitable ventures and return value to shareholders. The company’s net-debt-to-capital ratio stands at 34.8%, close to the mid-point of the company's long-term targeted range of 30%—40%. Furthermore, the company is rationalizing its capital expenditures, including store-remerchandising efforts, to improve its return on investment. As a result, Leggett, which competes with Genuine Parts Company (GPC), hopes to generate substantial future cash flows.
Coming to Leggett’s quarterly performances, the company has posted positive earnings surprise in three of the trailing four quarters, with an average surprise of 1.9%. In third-quarter 2014, the company demonstrated a significant progress in its efforts to boost sales, recording 14% year-over-year growth. Moreover, it was the company’s third consecutive quarter of gradual improvement in rate of sales growth driven by robust development in majority of its businesses.
This improvement in top-line performance along with a lowered share count has carried down the income statement resulting in an expansion of margins and consistent growth in earnings per share. We also remain optimistic about the company’s future performance given a positive outlook for fiscal 2014 and upward estimate revisions.
Other Stocks to Consider
Other stocks performing well in the furniture sector include Hooker Furniture Corp. (HOFT) and Norcraft Companies Inc. (NCFT), both carrying a Zacks Rank #2 (Buy).
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