Most of the the firm's sales are derived from the U.S. market (67% of revenue), but Leggett & Platt also has a presence in overseas markets, including fast-growing emerging economies such as China (10%).
Leggett & Platt is a dividend aristocrat and has increased its dividend for 48 consecutive years.
This low amount of spending is due to the fact that most of Leggett & Platt's products have long life cycles, meaning the company doesn't have to continuously redesign them and can amortize its costs better over time.
By focusing on components that are functionally essential to end products but typically represent less than 25% of a product's finished cost, Leggett & Platt is also better positioned to price its products based on the value they provide rather than on the cost of its raw materials.
The niches Leggett & Platt competes in generally have a slow pace of change, too. While the processes and materials used to produce certain goods evolve over time (e.g. foam mattresses), the problems solved by mattresses and furniture are timeless.
About two thirds of bedding and furniture purchases are also made to replace existing products, making it more difficult for new entrants to quickly take market share or capitalize on emerging trends.
The firm also benefits from having manufacturing facilities located around the world, allowing it to steer clear of tariff issues and source raw materials at the cheapest global rates.
Coupled with its entry into key markets many decades ago, Leggett & Platt has built No. 1 or No. 2 market share positions in most of its categories. The company has also extended the scope of its business with the help of acquisitions.
In 1960, bedding components represented nearly 100% of Leggett’s sales. Bedding represents less than half of the company's revenue today, underscoring the firm’s expansion into adjacent markets over the last 50-plus years.
Acquisitions have helped the company stay relevant in its existing markets as well. For example, in 2018 Leggett & Platt acquired Elite Comfort Systems (ECS) for $1.25 billion. ECS is a leader in high-quality specialty foam used in bedding and furniture markets.
Premium foam and hybrid mattresses are expected to gain share as online mattress sales continue growing rapidly. "Boxed bedding" is an emerging trend, especially in the online mattress channel, and ECS derived 30% of its revenue from these products, improving Leggett & Platt's long-term positioning.
Going forward, management expects the business to continue generating 6% to 9% annual revenue growth in the long term, including about a 2% contribution from acquisitions.
Expanding its addressable markets in bedding (compressed mattresses, online sales, etc.) and automotive (cables, electronics, actuators, etc.) are key growth drivers, along with developing new growth platforms in markets such as aerospace and hydraulic cylinders.
Margins are also expected to tick higher, and a 50% payout ratio target should ensure the dividend remains well covered.
Overall, the company's long-term goal is to achieve total returns in the top third of S&P 500 companies, and management has historically proven that it has the disciplined capital allocation skills to usually hit its growth targets.
While these will remain important factors going forward, they seem unlikely to affect Leggett & Platt's long-term earning power.
The bigger issue to monitor is Leggett & Platt's ability to continue delivering profitable growth as it manages changes across the numerous product lines it competes in.
For example, bedding accounts for about half of Leggett & Platt's total revenue and is undergoing meaningful change. Over the next five years management expects the direct-to-consumer channel (i.e. online bed-in-a-box brands) to grow to roughly 40% of the market and private label retail to reach about 25%.
This could put pressure on some of the mattress stores Leggett & Platt works with, and the company is also adapting to the rise of hybrid mattresses, which are more complex to make since they use memory foam and innersprings.
Leggett & Platt is trying to stay ahead of these changes and others with investments in innovation and acquisitions of businesses like ECS. However, with so many different products to oversee, it could be difficult for management to get the company firing on all cylinders and fend off new competitors.
After all, not every niche will prove to be profitable in the long term. In fact, Leggett & Platt has pared back its number of business units from nearly 30 to less than 15 today as management moved away from commoditized (i.e. low margin) sales and placed greater emphasis on specialized products.
Going forward, investors must trust in management's portfolio management capabilities, which includes acquisitions. Buying ECS added significant debt to the balance sheet, reducing some financial flexibility to make other acquisitions over the next couple of years.
Should Leggett & Platt pursue another large deal in the future and overpay or miss on its expected synergy benefits, then investors could lose some of their faith in management and the firm's ability to hit its growth targets. For now, the company deserves the benefit of the doubt due to its solid track record.