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Leggett (LEG) Regains Strength: What's Driving the Stock?

Leggett & Platt Inc. LEG shares have regained momentum of late primarily as the company returned to positive earnings trend in the last reported quarter. Further, the company’s focus on developing its business portfolio, solid outlook, strategic initiatives and a disciplined capital allocation strategy bode well for future growth. The company’s potential to grow is further supported by a long-term earnings growth rate of 10% and Growth Style Score of “B”.

Notably, this Zacks Rank #3 (Hold) stock jumped 4.5% in the past three months, outperforming the Zacks categorized Consumer Discretionary sector’s growth of 1.6%.

What’s Aiding Stock Performance?

Much of the recent growth in stock price can be attributed to its solid earnings trend as evident from the earnings beat delivered in six of the preceding seven quarters. Consequently, the company has an average positive surprise of 2.3% in the trailing four quarters.

Leggett & Platt, Incorporated Price, Consensus and EPS Surprise

Leggett & Platt, Incorporated Price, Consensus and EPS Surprise | Leggett & Platt, Incorporated Quote

Further, Leggett’s confidence in delivering solid 2017 results backed by volume growth through content gains, new products, enhanced market share and overall market advancement, is providing a boost to sentiments. Following first-quarter 2017, the company reiterated previously issued outlook for 2017, wherein it expects solid profit margins and earnings per share growth, largely driven by expected sales growth of 5–8%.

Additionally, Leggett recently chalked out its goals for 2019, based on the achievement of its top-third TSR target over the next three years. These targets include revenue of about $4.75 billion, EBIT margin of 13.3%, earnings per share of $3.25 and a dividend of $1.70 per share. The company intends to achieve these goals, given a stable macro environment with decent demand enhancement along with persistent content gains and product introductions. Further, the company anticipates these targets to be fueled by organic growth, which in turn is expected to be backed by strategic buyouts, with the absence of any non-recurring factors.

Further, the company remains on track with its long-term strategic plan, which was announced in Nov 2007. The company has successfully completed the first two parts of the strategic plan, wherein it divested low-performing businesses in the first part and boosted margins as well as returns in the second part. Leggett is now working on the third part of the plan, which aims to achieve top-line growth of 4–5% annually. Moreover, we believe Leggett has significant operating leverage to accomplish the third part of its plan as it has a considerable amount of retained spare production to meet the demand of $4 billion. Solid market demand, along with market share gains, has been enhancing capacity utilization over the years. Hence, the company will not require any large capital investment.

Moreover, Leggett’s disciplined capital allocation strategy remains noteworthy. The company’s capital strategy has always remained focused on making investments to develop business, while using excess cash to enhance shareholder returns through dividend payouts and share buybacks.

Going forward, 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. Also, the company plans to repurchase 3–4 million shares in 2017 in particular, while issuing nearly 2 million shares for employee benefit plans. As for dividends, the company outlined the target dividend payout ratio to be 50–60% of net earnings, in 2017. Moreover, the company is rationalizing capital expenditures, including store-remerchandising efforts to improve its return on investment.

Possible Deterrents

The company’s performance remains prone to the fluctuations in raw material prices, particularly steel. Moreover, management expects the inflationary pressure on steel prices to persist in 2017, which may hurt Leggett’s earnings. Further, currency woes and stiff competition pose significant threats.

Bottom Line

Though the company’s impediments cannot be ignored, we believe that its strategies and future targets indicate that it is surely poised for growth. However, we would suggest holding on to the stock to reap the benefits of the company’s long-term plans.

Stocks to Consider

Better-ranked stocks in the Consumer Discretionary sector include Marriott International MAR, G-III Apparel Group, LTD. GIII and Cherokee Inc. CHKE, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Marriott International has jumped nearly 8.2% in the last three months. Moreover, the company has an average positive surprise of 5.2% in the trailing four quarters.

G-III Apparel has grown 17.8% in the last three months. Moreover, the company’s positive estimate revisions for the current fiscal bode well.

Cherokee has a long term earnings per share growth rate of 15%. Moreover, the company’s estimates for the current quarter have witnessed positive estimate revisions in the last 30 days.

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