Leggett & Platt Inc. (LEG, Financial) is in the business of producing above-market shareholder returns. It also designs and produces engineered components and products found in cars and homes.
The company’s three core segments include Bedding Products, Specialized Products and Furniture, Flooring and Textile Products. Specific products include bedding components (springs), automotive seat support and lumbar systems, specialty bedding foam and private-label finished mattresses, components for home furniture and work furniture, flooring underlayment, adjustable beds and various other products.
Approximately 50% of revenu is derived from bedding-related products. With a history dating back to 1883, the company has been public since 1967 and currently has a market capitalization of $4.8 billion.
Investment premise
Leggett generates good cash flow and has a strong balance sheet. The company has historically been a disciplined allocator of capital, with 50 consecutive years of dividend increases.
The company is the leader in most markets that it serves and there are very few large competitors in their industries. Leggett's management believes there are still long-term growth opportunities through internal efforts (organic growth), general market growth and tuck-in acquisitions. The bedding, furniture and automobile industries are all large addressable markets.
Company management has a relatively high level of stock ownership, with many foregoing cash compensation in exchange for stock compensation. Incentive compensation is aligned with the company’s concept of total shareholder return.
Financial review
The company reported strong 2021 results despite having to deal with supply chain issues, labor shortages and transportation challenges. Revenue increased 19% to $5.07 billion, mostly due to price increases to offset raw material cost challenges. Volumes were flat in Bedding Products, but increased 9% in the Furniture & Flooring segment and 7% in the Automotive business.
Adjusted operating income increased 25% to $568 million and operating margins increased to 11.2% from 10.6% in the prior year. Adjusted earnings per share was a record $2.78 in 2021.
The company had $362 million in cash and equivalents at year-end as well as $2.09 billion in total debt (excluding capital lease obligations) . The company’s net debt-to-Ebitda ratio was 2.29 on a trailing 12-month basis. With expected earnings growth in 2022 and strong free cash flow, that ratio may drop below 2 in 2022.
Operating cash flow was way down in 2021 to $271 million due the impacts of inflation and planned investments in inventory across some of its business lines. It is expecting to return to normal levels in 2022.
Valuation
The company provided long-term goals of 6% to 9% revenue growth, operating margin improvement to the 11.5% to 12.5% range, a dividend payout ratio of approximately 50% of earnings and share buybacks when free cash flow is available.
Near-term 2022 guidance calls for revenue growth of 4% to 10%, volumes increases of flat to mid-single digits and small acquisitions made in 2021 to add 1% in sales growth. Operating margins are expected to be in the 10.5% to 11% range and would provide earnings in the range of $2.70 to $3 per share. Operating cash flow should return to normal levels of approximately $600 million, which should easily cover capital expenditures of $150 million and dividend payments of $230 million.
Consensus analyst earnings per share estimates are $2.82 for 2022 and $3.08 for 2023. This values Leggett & Platt at low price-earnings ratios of 13 and 12 respectively. This is below historical averages for the company, which typically trades at mid-to-high teens multiples.
The current dividend payment per share is $1.68 and equates to a 4.68% dividend yield, which is more than twice the market average yield.
Guru trades
A guru who has purchased Leggett & Platt recently is Jim Simons (Trades, Portfolio)' Renaissance Technlogies. Gurus how have reduced their positions include Chuck Royce (Trades, Portfolio) and Lee Ainslie (Trades, Portfolio).
Conclusion
Leggett & Platt's stock appears to be undervalued at this time as most valuation ratios are below historical averages. This seems unsustainable as the company’s cash flow will return to normalized levels in 2022. In 32 out of the last 33 years, operating cash flow has exceeded capital expenditures and dividend payments.
The company has been well-managed and has a history of operational excellence and shareholder focus, so I expect above-market returns going forward from these low valuation levels.
