Friday, December 25, 2015

Leggett & Platt: Buy, 18% Potential Upside Over The Next 12 Months, Driven By Earnings $LEG, #in, #earnings

Topline, margins and mix accelerating. You don't find that too often today.

18%+ upside over the next 12 months.

Exciting mix change to faster-growing auto segment becoming 1/4th of their business, higher margin and up to 7-year customer buying cycles.
Leggett & Platt (NYSE:LEG) is expected to report earnings February 1st, after the market closes.
LEG has shown almost two years now of consistent topline growth. In the last several quarters, that has started to build on itself to have driven accelerating margins. The combination of an industry cycle turning up, typical operating leverage at furniture companies as they begin to fill-up unused capacity, and a new driver in the auto sector have all helped to drive accelerated earnings growth.

Automotive Increasing Overall Visibility

As opposed to depending on individual customer purchases, automotive has much longer buying cycles. When a company gets designed in by an auto OEM, the lifecycle of that demand can last for as much as seven years. LEG has stated they have been winning multiple new OEM customers' business for some time and are continuously penetrating the percent of content of existing customers.
LEG claims to be the market leader for consumer component parts in the home such as bed springs, coils, frames and more. They have taken this expertise and transferred it to component parts in the comfort portion of the auto, mainly providing lumbar technology but they also sell all sorts of comfort components for the driver and passenger.
The company has said that auto makes up about 15% of revenues or more. We think the overall EBIT margins could be around 20%, because the company has said it's higher than their 'specialized' businesses average (which is 16% EBIT). This compares favorably to the company average of around 12% EBIT margins. That means to us that auto can make up 20-25% of profits. The company has stated that this business is growing faster than the company average, so we believe it can make up 1/3 in a year or two.
Car buyers are judging the car they buy based on the comfort of the ride which is highly influenced by the comfort of the seat itself. High end cars always had lumbar support. Mid-tier and lower-end are adding lumbar support more and more. High-end OEMs are adding lumbar in passenger seats, backseats and 3rd rows and the lower tiers are also steadily adding lumbar content throughout the car. Not only is the number of lumbar supports per car going up but the technology is advancing increasing the price LEG receives.
LEG prides itself on having more patents in this space than anybody and is among the key or sole, suppliers to all OEMS. Yes, they supply to all car manufacturers around the world, that is not an exaggeration.
The revenue growth for this segment is tracking low-mid teens versus the company average of 5-10%. Higher margins and higher growth rate are increasing as a percent of the overall mix as is visibility. Thus, the overall pie within LEG is becoming more valuable.

Housing Cycle Benefit

While the overall economy may have strengths and weaknesses, the housing market has been strong.
New housing starts have been gradually climbing giving support to overall demand.

Company Has Been Beating Expectations Driven by Consistent Topline



Chaim Siegel has been working with hedge funds and mutual funds as an analyst and PM his entire career. Chaim specializes in earnings and predicts, analyzes and reacts to earnings and earnings events as well as developing current company stories with a hedge fund perspective. If you want his analysis real time sign up to the right for real time email alerts.

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