Divestitures And Debt Reduction Will Improve Efficiency And Profitability

Key Takeaways

• Strategic restructuring and asset divestment aim to boost operational efficiency, profitability, and net margins.
  
• Deleveraging and reinvestment efforts focus on enhancing balance sheet strength, increasing net earnings, and potentially boosting EPS growth.
  
• Restructuring, tariffs, weak residential demand, and geopolitical trade issues create risks to revenue growth, while aerospace divestiture adds uncertainty to future earnings.

Catalysts

Designs, manufactures, and sells engineered components and products in the United States, Europe, China, Canada, Mexico, and internationally.

• Leggett & Platt's strategic restructuring efforts, including divesting non-core assets and consolidating operations, are expected to improve operational efficiency and profitability, positively impacting net margins.
  
• The sale of the Aerospace business and reinvestment of proceeds into debt reduction is anticipated to enhance the balance sheet and reduce interest expenses, potentially increasing net earnings.
  
• Efforts to shift sourcing and production in response to tariffs could create opportunities for increased demand for domestically produced products, positively impacting revenue growth.
  
• Expected benefits from steel tariffs, including expanded metal margins and increased demand for rod and wire operations, may contribute to revenue and margin expansion in the Bedding segment.
  
• Focus on deleveraging and potential use of cash for strategic acquisitions or share repurchases, if the stock remains undervalued, could contribute to earnings per share (EPS) growth.

Leggett & Platt Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Leggett & Platt's revenue will decrease by 0.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from -11.9% today to 4.5% in 3 years time.
• Analysts expect earnings to reach $196.3 million (and earnings per share of $1.37) by about May 2028, up from $-512.5 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.4x on those 2028 earnings, up from -2.5x today. This future PE is greater than the current PE for the US Consumer Durables industry at 8.9x.
• Analysts expect the number of shares outstanding to grow by 0.79% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

Leggett & Platt Future Earnings Per Share Growth

Risks

• The ongoing restructuring activities, while aimed at improving efficiency, are creating sales attrition which may continue to impact revenue negatively until completed.
  
• The complex and fluid tariff environment presents a risk of increased inflation, which could dampen consumer confidence and reduce demand, impacting future revenues and net margins.
  
• Weak demand in residential end markets, observed in declining sales across Bedding Products, might persist, affecting revenue growth if consumer spending doesn't rebound.
  
• Exposure to geopolitical trade issues, such as tariffs on materials needed in the Adjustable Bed business, may lead to higher input costs and reduced competitiveness, impacting overall earnings.
  
• The divestiture of the Aerospace business, pending regulatory approvals, could create uncertainty in revenue streams, affecting future earnings and potentially limiting growth opportunities.

Valuation

• The analysts have a consensus price target of $9.667 for Leggett & Platt based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $11.0, and the most bearish reporting a price target of just $8.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $4.4 billion, earnings will come to $196.3 million, and it would be trading on a PE ratio of 9.4x, assuming you use a discount rate of 11.4%.
  
• Given the current share price of $9.57, the analyst price target of $9.67 is 1.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.