Leggett & Platt: Down But Not Out From A Historical Perspective

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Investment Thesis

Leggett & Platt (NYSE:LEG) has declined from the caller highest show owed to macro pressure, but its wide spot hasn't been impacted. The company's currency travel is inactive dependable and it has country to conserve currency to protect dividend payout. Looking backmost for 20 oregon 30 years, it has weathered past volatile periods with endurance and its improved capableness successful technological innovation and capableness volition supply much enactment this time. The terms autumn has priced successful ample bearishness and we deliberation the valuation has go attractive. We urge a bargain for investors to hold retired with a 7.1% dividend yield.

Company Overview

Leggett & Platt, founded successful 1883 with office successful Carthage, Missouri, is simply a large shaper of alloy coil bedsprings and a supplier of adjustable beds, and a wide scope of engineered components and products homes, automobiles, aerospace and operation industries, with home organisation in the US and a planetary sourcing network. The institution has 3 segments: Bedding Products; Specialized Products; and Furniture, Flooring & Textile Products.

Strength & Weaknesses

Leggett & Platt has a divers portfolio with Bedding successful the US, accounting for astatine slightest 30% of each sales, to beryllium its largest contributor to nett sales, portion important income successful Automotive and Flooring & Textiles, and geographically important beingness successful Europe and China.

LEG: Product Mix and Geographic Split (Company Q2 presentation)

As 1 of the oldest manufacturers of bedding springs successful the country, Leggett & Platt remains a person successful the field. Its breadth of merchandise offering and vertical integration provides ample selections and outgo savings to its customers, portion its starring R&D innovates successful some innerspring merchandise specialty and efficiency. With US Bedding and Automotive Cabin Comfort markets combined, it has ample addressable markets of implicit $30 billion. Its heavy manufacture cognition accumulated implicit a 100 years and a planetary footprint adhd to the endurance of this company's quality to upwind antithetic economical conditions.

LEG: Bedding Innovation (Company Q2 Presentation)

Indeed, the company's show is taxable to economical cycles, which span done periods longer than conscionable the past fewer quarters. Upfront successful the Q2 presentation, it has a wide presumption to investors connected wherever their macro exposures are, 55% to user durables, 20% to the automotive industry, and 25% to aerospace and operation equipment. It concluded that user assurance is the astir important economical origin that impacts its sales, since the 2nd oregon the 3rd bedding/furniture purchases are usually a replacement of the existing one, which is simply a deferrable "large ticket" point expense. While different factors specified arsenic full lodging turnover, employment levels, user discretionary spending, and involvement complaint levels besides person beardown impacts.

Not surprisingly, arsenic a user durable company, their products are the archetypal ones to beryllium "deferred" erstwhile determination is simply a slowdown successful user spending. But wrong the humanities context, its revenue, though has dropped by astir 8.5% YoY, is inactive astatine the highest levels since 2008.

LEG: Revenue (Calculated and charted by Waterside Insight with information from company)

With that successful mind, to spot however Leggett & Platt volition fare nether the existent and near-term macro environment, we cheque wherever its net basal with respect to user assurance since 1989, assuming specified assurance to a precocious grade reflects employment level, tendency to walk discretionarily, and involvement complaint level. The existent level of the University of Michigan Consumer Confidence level astatine 63 speechmaking is hovering astatine the little extremity of the past 20 years. If the assurance stays astatine this level for the adjacent fewer quarters, its escaped currency travel appears to person reached the bottommost and doesn't person much downside to autumn from here.

LEG: Free Cash Flow vs Consumer Confidence (Calculated and charted by Waterside Insight with information from institution and FRED)

The falling top-line maturation has induced little maturation successful gross profits and nett income, which besides person seen astir a 43% YoY decline, reaching the little scope of the past 10 years. But its escaped currency travel has held up connected an upward inclination connected a TTM basis, recovering from a autumn successful precocious 2021.

LEG: Free Cash Flow, Net Income vs Gross Profits (Calculated and charted by Waterside Insight with information from company)

One of the difficulties that pressures its gross profits is its operating expenses. While its operating income has dropped by 38% YoY, its operating expenses are inactive rising. Such divergence has produced a ample spread betwixt them. But specified a spread has occurred earlier successful '06, '08, '09, '12, '15, and erstwhile again successful 2020. What it shows is it is not uncommon for LEG to person volatile operating income, and the existent autumn isn't adjacent 1 of the astir terrible ones. It does request to rein successful its rising operating expenses, but its outgo of goods, which accounted for astir 80% of revenue, is precise unchangeable astatine this level successful the past 2 decades. This level is presently astir 86%.

LEG: Operating Expenses vs Operating Income (Calculated and charted by Waterside Insight with information from company)

But you wouldn't announcement it if you were an income maturation capitalist who lone pays attraction to its dividend. It simply hasn't chopped erstwhile successful astir the past 20 years.

LEG: Dividend History (Calculated and charted by Waterside Insight with information from company)

In fact, its NOWC is rising with a ample publication from the higher inventory, but adjacent without inventory, the quality betwixt its relationship receivables and payables is inactive astatine a humanities mean successful the past 10 years oregon so.

LEG: Cash Conversion (Calculated and charted by Waterside Insight with information from company)

Digging into Leggett & Platt's currency conversion cycles, we find that specified a rhythm has prolonged by astir 10 days from its past 10 years' mean to 80 days, astir wherever it was successful 2010-2011. The institution really hasn't had a important emergence successful days income outstanding, fixed the little user assurance speechmaking registered successful October past twelvemonth and April this year. And to assistance this cycle, its days of payable are astir 20 days longer than wherever they were successful the pre-'08 period. The largest emergence is driven by its days of inventory, which is astir 10 days higher than its mean earlier the pandemic. Overall, its currency conversion rhythm ended up rising by astir 9-10 days supra the past 8 years' mean but is inactive amended than the stressful play successful '08.

LEG: Cash Conversion Cycle (Calculated and charted by Waterside Insight with information from company)

Incidentally, Leggett & Platt's existent terms is wherever it was successful 2010-2011. This is rather interesting. So tin it truly spend the dividend payout with the existent currency travel condition? It has a batch to bash with however it spends its cash. According to its 2022 10K, its

long-term priorities for uses of currency are: money integrated maturation including superior expenditures, wage dividends, money strategical acquisitions, and repurchase banal with disposable cash.

The institution regards strategical acquisitions arsenic portion of the proviso of integrated growth. It has a strategy that emphasizes competitory vantage and enhances its existent capabilities with synergies and debased risks of disruption.

LEG: Acquisition Strategy (Company Q2 Presentation)

2022 marked a engaged twelvemonth of acquisitions for Leggett & Platt. The institution acquired 2 Canadian distributors of geo components for implicit $20 cardinal successful total, and a starring planetary hydraulic cylinder shaper for $61 million, positive a tiny US textile concern for $2 million. In total, it reported spending adjacent to $112 cardinal successful acquisitions past twelvemonth to boost capableness successful its 2nd largest conception Furniture, Flooring & Textile Products, which it sees arsenic an charismatic marketplace going forward. In 2021, its acquisitions were mostly focused connected uncovering targets that tin complement its existent products and capabilities, specified arsenic a UK shaper successful metallic ducting systems with applications successful abstraction and military, a Polish shaper successful bent metallic tubing for furnishings successful offices, and a foam and finished mattress shaper successful UK and Ireland. They payment each of the different smaller segments, specified arsenic location and enactment furniture, automotive, and aerospace successful revenue. The institution expects these acquisitions could make returns good supra its WACC, which is presently astatine 7.64% successful our estimate.

LEG: Recent Acquisitions (Company Q2 Presentation)

Its spending successful CapEx and dividend paid are much comparable with erstwhile years, portion its largest summation successful uses of currency from the past 2 years came from acquisitions, which was zero for 2020, and banal repurchase, which was astatine a minimal level successful '20 and '21.

LEG: Main Uses of Cash (Calculated and charted by Waterside Insight with information from company)

Its currency and currency equivalents astatine $272 cardinal truthful acold this twelvemonth is astatine the mean of the past 3 years. In its 10K, the institution expects acquisition activities to beryllium minimal this year, and its banal repurchase successful 2023 to beryllium little than past year. So by regressing backmost to their levels 2 years ago, these 2 items could prevention implicit $100 - $170 cardinal successful currency for this year, which is much than one-third of its existent currency and currency equivalent. Given the company's accent connected committedness to "extending the 52-year past of consecutive yearly increases", we deliberation its dividend should beryllium safe.

Data by YCharts

Fitch downgraded Leggett & Platt's standing a period agone chiefly owed to its higher debt-to-EBITDA ratio. The institution has made ample repayments of $301.5 cardinal to service semipermanent indebtedness successful 2022. So the full indebtedness has declined by astir 8%. Although its debt-to-EBITDA ratio rising successful opposition to the little debt-to-equity ratio, this is not from higher indebtedness but owed to little EBITDA successful caller quarters. Should the past 2 years' acquisitions footwear into gears to nutrient above-WACC returns, its EBITDA should spot betterment from here. Overall, the debt-to-EBITDA ratio is precocious but inactive manageable, which Fitch gives a unchangeable outlook.

LEG: Debt Ratios (Calculated and charted by Waterside Insight with information from company)

Leggett & Platt's banal prices really bash not bespeak its retained net growth. Although its gross has travel disconnected its historical peak, the institution presently has implicit 60% of its gross arsenic retained earnings, which successful its implicit worth is astatine its highest levels successful the past 15 years. This level has been unchangeable since 2022. In contrast, its banal prices person fallen astir 60%.

LEG: Retained Earnings (Calculated and charted by Waterside Insight with information from company)

Financial Overview

LEG: Financial Overview (Calculated and charted by Waterside Insight with information from company)

Conclusion

To spot the future, we sometimes request to spell backmost to the past. For Leggett & Platt, the astir salient catalyst to its show came from macro pressure, which has cycles of implicit a decennary oregon longer. From our humanities analysis, we judge the institution has capable resources to not chopped the dividend portion inactive satisfying its regular cognition and maturation spending. While for the mean term, the past 2 years of acquisition could supply much integrated maturation potential. With the spot successful its currency travel and retained earnings, LEG to autumn by implicit 60% does look to person priced successful excessive bearishness, which could beryllium derived straight from the macro outlook. We deliberation the valuation started to look attractive. Although the macro representation volition proceed to unit this stock, semipermanent investors who person income generating successful caput tin commencement accumulating astatine oregon beneath existent prices to cod the 7.1% dividend output portion waiting retired the volatility.

We are data-oriented investors with implicit 20 years of concern acquisition successful stocks, fixed income, forex, commodities futures, and options with success. With our unsocial approach, we supply autarkic opinions and insights focused connected discovering medium-term concern opportunities. Waterside Insight is simply a wholly-owned subsidiary of RootBanyan Capital Management LLC.