FLXS Flexsteel Industries Inc

We have maintained our long-term 'Neutral' recommendation on Leggett & Platt Incorporated (LEG) with a target price of $27.00 per share. Moreover, the company has a Zacks #2 Rank, implying a short-term 'Buy' rating on the stock.

Headquartered in Carthage, Missouri, Leggett is a global manufacturer of engineered components and products used in many homes, offices, retail stores and automobiles. The company has a well-diversified customer base and sound research and development (R&D) division, which offer a competitive edge and strengthen its pricing power in the market.

Furthermore, Leggett has taken strategic steps to optimize its capital allocation and concentrate on core business activities. Consequently, the company has divested underperforming business units including Storage Products, Coated Fabrics, Aluminum Products, Wood Products and Fibers, Plastics, dealer portion of Commercial Vehicle Products, and Prime Foam Products between 2007 and 2010.

Apart from this, Leggett is in the midst of its three-part strategic plan announced in November 2007. The company has till date successfully completed the first two-parts of its strategic plan. The first part was to divest low performing businesses while the second part comprised improvement in margins and returns. At present, Leggett is moving towards the third part of its strategic plan for achieving an annual growth rate of 4.0% to 5.0%. Moreover, Leggett has significant operating leverage to accomplish the third part of its strategic plan as the company has a considerable amount of retained spare production to meet the demand of $4.0 billion. Hence, the company will not require any large capital investment.

Besides, the company has increased its sales guidance for fiscal 2011 in the range of $3.5 to $3.8 billion from $3.4 to $3.6 billion in anticipation of a steady revival in the U.S. economy. On the back of promising sales, Leggett also increased its forecasted 2011 EPS in the range of $1.25 to $1.50 per share from $1.20 to $1.40 per share.

However, Leggett's operating performance is heavily dependent on the price of raw materials, particularly steel. Global steel markets are cyclical in nature and the commodity has witnessed extreme volatility in the recent years, leading to significant swings in pricing and margins for the company. Moreover, higher raw material prices have prompted some of Leggett's customers to prefer lower cost components over higher cost ones, thereby adversely affecting margins. A continuation of this trend is likely to affect the company's operating performance.

Moreover, Leggett's significant international presence exposes it to unfavorable foreign currency translations. Doing business in foreign countries may have a substantial effect on Leggett's operations and financial performance, as almost 25% of the company's revenue is generated from its international operations.

Above all, the company faces intense competition from its rivals, such as Flexsteel Industries Inc. (FLXS), Genuine Parts Co. (GPC), Steelcase Inc. (SCS), The Rowe Companies, and Knape & Vogt Manufacturing Co. Leggett and Platt also faces competition from local and regional players in the respective foreign countries where it operates. Operating in such a high competitive industry, Leggett may find it difficult to execute and implement new business strategies, which in turn, may impact its operations adversely.

 
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