LEG not Pulling its Weight as an Aristocrat

Founded in 1883, Leggett & Platt is a leading international diversified manufacturer of a wide range of engineered components and products used in homes, offices, automobiles, and aircraft. The company is a pioneer of the steel coil bedspring and a leading provider of differentiated bedding products. Some of the company’s major products are bedding products, automotive seat support to home furniture and high-carbon drawn steel wire.

Leggett & Platt operates through three segments – Bedding Products (46% of 2019 sales), Specialized Products (23%), and Furniture, Flooring & Textile Products (31%). It has a global presence with a distribution network spread across Europe, China, Canada, and Mexico and derives nearly 34% of its total revenues from international markets. The company serves a wide range of customers including bedding, residential and office furniture producers, automotive OEM and Tier 1 manufacturers, and a variety of other companies. Leggett & Platt is made up of 15 business units and 145 facilities in 18 countries.

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Revenue Growth & Market Exposure

Leggett & Platt’s 135-year old expertise in the bedding components industry has allowed it to build rich capabilities in this industry. It is also the world’s leader in the design and production of high-speed wire forming equipment, recliner mechanisms, seating systems, and sofa sleeper units. Some of its major customers include leading mattress companies in the U.S. like Best Home Furniture, Herman Miller, Knoll, Home Depot, Tesla, Walmart, Lowe’s, etc. It has a huge customer base worldwide with many long-term business relationships. The company is the leader in most markets it serves.

Leggett & Platt continuously researches and develops new innovative products for its customers. The company’s bedding business is well-positioned to benefit from compressed mattresses that have revolutionized the U.S. online bedding industry. Leggett is known as the market leader in technology for seating comfort in the automotive business and should gain as the demand for comfort and convenience continues to grow with an addressable market size of $20 billion. It has an impressive patent portfolio consisting of more than 1,500 patents and 1,000 trademarks. Leggett & Platt’s key differentiating advantages are its strong brand, long-standing customer relationships, technological edge, and a global distribution network.

Though Leggett & Platt were adversely affected by reduced consumer discretionary spending during the pandemic, COVID-19 accelerated the growth of online purchasing and compressed mattresses. The company’s vertically integrated structure allows keeping costs in check. Only 25% of its total costs are fixed in nature and the management is further cutting costs. The company withdrew its financial guidance, amidst reduced demand. The company is targeting a 6%-9% average annual revenue growth over the long term.

Dividends

Leggett & Platt is a member of S&P’s Dividend Aristocrats as it has increased its dividends for 49 years consecutively – an impressive record that only ten S&P 500 companies have exceeded at present. The company last increased its dividend by 1.3% and has an attractive dividend yield of 4%. It has a high payout ratio of 95% and has raised its dividends by 4.5% CAGR over the last decade. The company paid $205 million in dividends and $7 million for stock purchases in the last year.

Leggett & Platt has a strong cash-generating business. It ended the quarter with $1.3 billion in liquidity with no significant maturities until August 2022. The management has a target of growing its revenue by 4%-5% over the long-term. Its EPS grew at an impressive rate of 29% CAGR in the last five years, however, the pace of growth has reduced in recent years.

Leggett & Platt continues to grow through strategic acquisition. Its acquisition of ECS further strengthened its position in the bedding market and contributed meaningfully to cash from operations and sales growth in the last year. The company further restructured the Home Furniture and exited the Fashion Bed business, resulting in improved margins in the Home Furniture business.

Leggett & Platt is targeting long-term sustainable EBIT margins in the range of 11.5%-12.5%. The company has future opportunities to grow given its large addressable markets. It is expecting near-term growth through a pipeline of awarded programs in Automotive, forward integration in Bedding, Aerospace, and Hydraulic Cylinders. Leggett has a payout target range of 50% and maintains an increasing dividend as its top priority for using cash.

Competition

Leggett & Platt’s key differentiating advantages are its strong brand, long-standing customer relationships, technological edge, and a global distribution network. Deep industry knowledge and customer engagement also form a wide moat around the company’s business. It faces competition from a few competitors like Tempur Pedic, Sealy, Bedframes, etc. The company also competes with private-label mattress manufacturers as well as online sellers.

Bottom Line

Leggett & Platt expects future growth to come from its strong Bedding and Automotive businesses which align perfectly with the dynamic markets. The company’s quality products and a presence across the entire value chain have resulted in sticky customer relationships. Leggett & Platt might face near-term challenges from changing trends in employment, consumer discretionary spending, and interest rate levels, however, its longer-term prospects are strong.

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DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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