Recent Performance and Market Reaction
Leggett & Platt (NYSE) has experienced a significant decline over the past three years, with its share price plummeting over 80%. The recent dividend cut, after maintaining a consistent payout for 53 years, further exacerbated the decline, causing an additional 25% drop in share value. The company’s struggles are primarily due to weakened industry conditions and increased low-cost competition from overseas, leading to a decline in revenue and margins. Despite these challenges, the current low share price presents a potential buying opportunity for long-term investors.
Industry Challenges and Revenue Decline
The bedding, furniture, and flooring materials industry, which constitutes the bulk of Leggett & Platt’s revenue, has been hit hard by slowing home sales. Rising interest rates since 2022 have reduced turnover in the housing market, directly impacting consumer demand for home furnishings. As a result, the company’s annual revenue is expected to drop to around $4.5 billion in 2024, down from $5.1 billion in 2022.
Competition and Margin Pressures
Leggett & Platt faces intense competition from both domestic and international players. The company’s operating margins have compressed, with a 7% decline in sales volume in 2023. Additionally, interest expenses are set to increase due to a $300 million 3.8% senior note maturing in November, which will be refinanced at higher rates.
Management Changes
Mitch Dolloff, the CEO since 2021, stepped down following the dividend cut announcement in Q2 2024. He is being replaced by Karl Glassman, the previous CEO from 2016-2021, who has been with the company since 1982. This leadership change aims to stabilize the company during these challenging times.
Comparative Industry Performance
Other companies in the industry, like Sleep Number (SNBR) and Purple Innovation (PRPL), have also seen declines in revenue and profitability. However, Tempur Sealy International Inc. (TPX), the market leader, has managed to maintain stable sales due to its strong brand presence and diversified product portfolio. This contrast highlights a vulnerability for Leggett & Platt, which primarily sells to other businesses rather than directly to consumers.
Valuation and Investment Thesis
Despite the challenges, Leggett & Platt’s current share price (around $11) might offer value for long-term investors. Management projects earnings of about $1/share in 2024, significantly lower than the $2-$3/share range from 2015-2022. Even with a conservative estimate, assuming continued pressure on margins and higher interest expenses, the company’s earnings power could be around $1.50/share. This implies an earnings yield of approximately 14%, which is attractive at the current share price.
Potential Catalysts
- Debt Reduction and Share Repurchases: Management’s commitment to paying down debt and potentially repurchasing shares at depressed prices could significantly enhance shareholder value.
- Industry Recovery: A rebound in the housing market would likely increase demand for the company’s products, improving revenue and margins.
- Segment Performance: The “Specialized Products” segment has shown revenue growth as supply chain disruptions ease, indicating potential for recovery in other segments as well.
Risks and Considerations
- Competition and Innovation: Leggett & Platt must stay competitive by controlling costs and investing in R&D to prevent market share erosion by competitors.
- Economic Uncertainty: Prolonged weakness in the housing market or further economic downturns could delay recovery and impact profitability.
Insider Confidence
Recent insider purchases totaling over $750K indicate a belief in the company’s recovery prospects. This insider activity is a positive signal for potential investors.
Conclusion
Leggett & Platt faces substantial challenges, but the current low valuation provides a potential entry point for investors with a long-term perspective. The company’s ability to generate positive cash flow, manage debt, and capitalize on a future housing market recovery positions it for potential rebound. Patience and a focus on the company’s strategic initiatives will be key for investors looking to benefit from this opportunity.
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