It’s Tuesday, so it’s time for me to discuss Barchart.com’s Top 100 Top/Bottom 100 Stocks to Buy.
As I look at the Bottom 100, I find nine have a share price of $10 or more—the remaining 90 trade in single digits. I’ll leave those for another day. In the meantime, Leggett & Platt (LEG) is a contrarian stock worth considering for aggressive investors.
Here’s why.
Business Is Not Good
Leggett & Platt is ranked 97th on the Bottom 100 with a weighted alpha of 72.05, higher than its 52-week loss of 67.16%, which means its entry on the list is a sign there could be more losses in the near term before the ship rights itself.
The business is so bad for the manufacturer of furniture and bedding products that on April 30, the company cut its dividend by 89% to 5 cents a share, down from 46 cents. That’s a 1.9% dividend yield, hardly enough to merit buying its stock for income alone.
Leggett & Platt put on a brave front when announcing its Q1 2024 results.
“Over the longer term, we expect to grow our business both organically and through strategic acquisitions, while also returning cash to shareholders via a combination of dividends and share buybacks,” CEO Mitch Dolloff said in its Q1 2024 press release.
Piper Sandler analysts weren’t nearly as upbeat. As a result of the deep cut, it dropped its price target by $3 to $13. It maintained its Underweight rating on LEG stock.
The bad news in the quarter included a 10% decline in sales to $1.1 billion with an adjusted earnings per share of $0.23, 41% lower than a year ago. At the midpoint, it maintained its 2024 guidance of $4.5 billion in sales and adjusted EPS of $1.20. Based on its current share price, it trades at 8.6x those earnings, which is by far the lowest P/E multiple over the past decade.
Can Leggett & Platt Be Turned Around?
On May 21, the company announced that Dolloff had resigned as CEO and would be replaced by Chairman Karl Glassman. That doesn’t come as a surprise, given the big dividend cut.
Dolloff spent over 20 years at the company, including the past 28 months as CEO. Glassman spent over 42 years at the company, including six years as CEO, until stepping down at the end of 2021.
“The restructuring plan, other operational improvement initiatives, and our focus on strengthening our balance sheet create a clear path toward a more focused, agile company with the ability to deliver improved profitability and enhanced shareholder value,” Glassman stated in the company’s press release announcing the management change.
LEG stock traded around $57 in May 2021 due to the pandemic and increased furniture purchases. It has lost 82% of its value in the three years since.
In January, Leggett & Platt implemented a restructuring plan that focused on its Bedding Products segment. This segment accounted for 39% of its 2023 revenue of $4.7 billion and needs the most fixing.
The big move is cutting the number of facilities from 50 to as low as 30 with a focus on higher-value products. Easier said than done. That said, rightsizing its manufacturing footprint is a low-hanging fruit.
It expects to find $40 million to $50 million in additional annual EBIT profits from the move while generating as much as $80 million from the sale of these facilities. Exiting less profitable product lines will cut annual revenue by approximately $100 million.
The restructuring is still in the early stages. As Lead Independent Director Robert Brunner said in the press release, “Karl knows the Company better than anyone.”
That’s a good thing if you’re a long-time shareholder.
What’s the Contrarian Play?
Since I spend a considerable ime writing about unusual options activity, I thought I’d check out today’s action.
There’s nothing off the charts with the highest Vol/OI ratio of 1.46x for the Dec. 20 $7.50 put. The only other Vol/OI ratio over 1.25x is the Sept. 20 $7.50 put at 1.25x. Neither is worth selling for income.
What does look attractive is the Dec. 20 $17.50 call with a $0.25 ask price. That’s a 1.4% down payment with 206 days to expiration. The delta is 0.12882, which means you can double your money selling the call before expiration if it rises by $1.94 (18.9%) over the next 29 weeks.
In the worst-case scenario, you’re out $25.
However, given that it remains overleveraged—its net debt at the end of April was 3.61x its adjusted EBITDA—this is a purchase for aggressive investors only.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
