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Leggett (LEG) Ups EPS View on Q1 Earnings Beat, Sales Lag

Keeping its positive streak alive for the third straight quarter, Leggett & Platt, Incorporated LEG posted better-than-expected earnings for the first quarter of 2016, which also encouraged management to raise its full-year earnings view. However, sales remained soft and missed estimates for the fourth consecutive quarter.

The company’s quarterly earnings surged 26% year over year to 63 cents per share and also surpassed the Zacks Consensus Estimate of 58 cents.
 

The bottom line growth was mainly aided by greater unit volumes, tax gains stemming from the new stock-based compensation accounting method and absence of impairment charges that were incurred last year.

Delving Deeper

On the contrary, Leggett’s net sales from continuing operations dropped 3% to $938.4 million, also falling short of the Zacks Consensus Estimate of $961 million. During the reported quarter, improvement from unit volume growth of 4% and acquisition-related gains of 1% were more than offset by adverse currency effects and raw material price deflation. Also, sales were impacted by divestitures that took place toward the end of 2015.

Including inter-segment sales, total sales came in at $1,056.6 million, down 4.1% year over year.

Gross profit jumped 7% year over year to $233.6 million, with the gross margin expanding 240 basis points (bps) to 24.9%.

Additionally, the company’s adjusted EBIT margin improved 190 bps to 13.5% in the first quarter, backed by better efficiency; greater unit volumes and solid portfolio management. In dollar terms, adjusted EBIT was up 13.4% to $127 million.

Segment Details

First-quarter Residential Furnishings’ sales dropped about 5% to $481.4 million, mainly due to currency headwinds and raw material price deflation that nullified the benefits from higher unit volumes. Including inter-segment sales, total sales for the segment fell 4.8% to $488.9 million.

Sales of Commercial Products advanced 14.4% to $141.3 million. Same location sales at the segment jumped 7%, mainly owing to increased volume in the Adjustable Bed and Fashion Bed units. Total sales for the segment grew 14.5% to $161.5 million.

The Industrial Materials segment's sales plunged 34.5% to $77.1 million, mainly due to steel price deflation, a drop in unit volumes in Drawn Wire and the sale of Steel Tubing, which was concluded in Dec 2015. Total sales, including inter-segment sales, fell 28.3% to $157.2 million.

The Specialized Products segment's sales rose 8.9% to $238.6 million on the back of volume growth witnessed in all businesses, somewhat negated by currency headwinds. Total sales for the segment jumped 9% to $249 million.

Financials

Leggett ended the quarter with cash and equivalents of $250.2 million, long-term debt of $1032.0 million, and shareholders' equity of $1,091.2 million. Leggett’s cash flow from operations came in at $111.3 million in the first quarter.

Further, the company had roughly $300 million available in its commercial paper program by the end of the quarter, with its net debt to net capital ratio coming in at 37%, thus falling within its target range of 30%–40%.

In Feb 2016, the company declared first-quarter dividend of 32 cents per share. During the quarter, the company repurchased nearly 2.5 million shares, while it issued 1.1 million shares related to employee benefit plans and stock option exercises.

Further, Leggett successfully achieved its targeted 3-year Total Shareholder Return (“TSR”), ranking in the top-third of all S&P 500 companies. The company generated annual TSR of 25% (in the last 28 months) for the three-year period starting Jan 1, 2014. This places the company’s annual TSR in the top 10% of the S&P 500 list.

Guidance

Overall, management remains impressed with the company’s performance and going forward, anticipates generating record EPS, robust EBIT margin and enhanced cash flows in 2016, driven mainly by solid unit volume growth across many businesses.

The company also expects improvement in unit volumes, largely stemming from new product introductions and the ensuing market share gains. Further, the company anticipates end market gains from favorable macroeconomic factors like consumer confidence, housing turnover and reduced energy prices, which should enhance results in 2016.

Consequently, the company continues to projects unit volume growth in 2016 to be in the mid-to-high single digits range. However, the company expects volume growth to be partly offset by 2% commodity deflation as well as a 2% reduction from the recently completed Steel Tubing divestiture.

Hence, sales for 2016 are still expected in the range of $3.9–$4.1 billion, reflecting year-over-year growth of 0%–5%.

Notably, in the light of solid first-quarter earnings, management raised its full-year earnings outlook to a range of $2.40–$2.60 per share from continuing operations, compared with $2.30–$2.50 predicted earlier. Moreover, the company now expects 2016 adjusted EBIT margin to be slightly higher than last year, compared with the earlier forecast of flat year-over-year growth.

Additionally, continuing with its trend of generating more cash than required to fund dividends and capital expenditures, the company now expects operating cash flows of nearly $500 million for 2016, higher than $450 million expected earlier. Capital expenditures for the year are anticipated to be approximately $130 million, while the company hopes to spend $175 million toward dividend payouts.

Further, Leggett expects to continue with its share repurchase program, having a standing authorization to buy back up to 10 million shares every year, after fulfilling all priority requirements. During 2016, Leggett intends to buy back 4–5 million shares, apart from issuing 2 million shares for employee benefit schemes.

Zacks Rank

Leggett currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the same industry include Hooker Furniture Corp. HOFT and American Woodmark Corp. AMWD, each with a Zacks Rank #1 (Strong Buy). Another stock worth considering in the consumer discretionary sector is Whirlpool Corporation WHR, with a Zacks Rank #2 (Buy).

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WHIRLPOOL CORP (WHR): Free Stock Analysis Report
 
LEGGETT & PLATT (LEG): Free Stock Analysis Report
 
AMER WOODMARK (AMWD): Free Stock Analysis Report
 
HOOKER FURNITUR (HOFT): Free Stock Analysis Report
 
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