Investor Essentials Daily

Tossing and turning because of the high rates

May 30, 2024

Interest rates are expected to remain high for an extended period, adversely affecting Leggett & Platt’s (LEG) main business in bedding products, which constitutes 42% of its sales. 

This sector has experienced declining demand due to reduced activity in the housing market and lower discretionary furniture purchases, attributed to increased borrowing costs. 

Consequently, the company’s revenues have been declining, with an 8% drop in 2023, and challenges in debt servicing due to these financial strains. 

Additionally, a recent change in CEO indicates potential internal concerns about the company’s performance. 

Investors are advised to be cautious, as the company’s stock is at its lowest since 2009.

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We have been discussing interest rates and their implications for some time now.

Based on comments from Federal Reserve officials and observations of economic data, it seems likely that interest rates will remain at elevated levels for an extended period.

This prolonged high-interest rate environment directly impacts Leggett & Platt’s (LEG) business.

While Leggett & Platt sells a range of furniture, flooring, and textile products, its largest revenue segment was still bedding products in 2023, which accounted for 42% of total sales.

The company’s bedding division primarily supplies various components and machinery used by bedding manufacturers, such as foam chemicals, steel rods, and drawn steel wires.

The bedding business has seen demand weaken due to the impact of higher borrowing costs on the housing and furniture industries. Rising mortgage rates have cooled the housing market, reducing demand for new beds and bedding.

Similarly, higher consumer financing rates have dampened discretionary furniture purchases. As a result, Leggett & Platt’s customers have scaled back orders.

Revenue reflects these demand headwinds, with the top line stagnating in 2021 and 2022 before declining an estimated 8% year-over-year in 2023. Furthermore, management noted on recent earnings calls that demand remains subdued across major industry clients.

If interest rates stay elevated as expected, housing and discretionary spending may not recover in the near term, prolonging pressure on Leggett & Platt’s sales.

Beyond demand issues, Leggett & Platt also faces challenges on the financial front. The company carries significant debt on its balance sheet related to past acquisitions. Servicing this debt load has become more difficult in the higher interest rate environment.

Our CCFP shows that Leggett & Platt may struggle to meet upcoming debt obligations from operating cash flows alone…

As a sign of underlying issues, Leggett & Platt appointed a new CEO last week after the previous chief, Mitch Dolloff, resigned from the role. This leadership change could suggest performance is falling short of expectations.

Our EEA shows that the market is aware of these headwinds, and the stock is trading at its lowest levels since 2009. However, investors should still be wary of this company and wait for a way out of these problems.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research

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