With operations dating back to the 19th century and a 3.1% dividend yield, LEG is an interesting company for dividend investors to analyze.
LEG gained some popularity among smart money investors during the third quarter, as the number of funds with long positions (among those tracked by Insider Monkey) went up to 23 from 12. However, the stock remains overlooked by many investors and the funds from the Insider Monkey database are generally overweight, having amassed some 2.40% of the company’s stock at the end of the third quarter of 2015. David Harding’s Winton Capital Management and Louis Navellier’s Navellier & Associates initiated stakes in LEG between July and September, and reported 821,669 shares and 318,867 shares in their last 13F filings.
LEG was founded in 1883 and patented the first steel coil bedspring. Over 130 years later, the company has grown into a diversified manufacturer of a broad variety of engineered components and products (e.g. innersprings, recliner mechanisms, adjustable beds, steel wire, seat frames, carpet cushion, armrests, etc.) used in bedding, furniture, carpet, cars, planes, and more around the world.
By end market, 21% of LEG’s 2014 revenue was bedding, 16% fabric / carpet cushion, 15% automotive, 15% steel wire, 11% furniture, 7% consumer products, 5% work furniture, 3% aerospace, 3% steel tubing, 2% machinery, and 2% commercial vehicle products.
Overall, LEG’s pegs its macro market exposure as follows: 55% consumer durables, 25% commercial / industrial, and 20% automotive.
By geography, approximately 69% of LEG’s production was in the United States, 11% in Europe, 10% in China, 6% in Canada, and 4% in other countries.
After learning more about LEG and its industry, coming up with the competitive advantages that have driven the company’s outstanding long-term performance was still challenging. We believe that the company’s management team has done an excellent job managing the business, and it’s worth mentioning the incentive system in place.
LEG’s management team receives bonus compensation that is based on incentives targeting annual return on capital employed, growth in margins, and achievement of a 3-year total shareholder return in the top third of the S&P 500. Insiders also own more than 10% of LEG’s outstanding shares, further aligning their capital allocation decisions with the best interest of the company’s shareholders. The company’s culture has certainly helped its longevity.
Back to LEG’s actual operations, its strongest advantages are its long-standing customer relationships and reputation for quality (LEG has been in the industry for over 100 years), its economies of scale as the largest player in the market (LEG is also vertically integrated), its focus on innovation to improve profits and growth, and its global distribution system.
Manufacturing components used in mattresses, furniture, cars, and other products is usually a tough business. Buyers are focused on keeping their costs low, and many components can easily become commoditized and purchased for less overseas.
LEG’s entry into its key markets many decades ago helped it acquire number one or number two market share positions, which it has successfully maintained through innovation (LEG has issued over 1,300 patents) and conservative capital allocation. As the biggest player with vertically integrated operations (LEG owns its own steel rod mill and machinery), LEG is often one of the lowest cost providers of its products. It has also developed innovations to adjust to shifting market trends, including adjustable beds and a “Comfort Core” innerspring used in hybrid mattresses that replaces traditional foam cores and innersprings.
Beyond product innovation and cost efficient operations, LEG has successfully expanded the scope of its business well beyond bedding components with the help of acquisitions. For example, LEG formed its Aerospace Products business unit with the acquisition of Wester Pneumatic Tube, a leading provider of integral components for critical aircraft systems, in January 2012. The company has also increased its focus on automotive markets (15% of sales), helping grow its global content per vehicle by 50% since 2009.
Through acquisitions, LEG has diversified its business into a number of niches that offer higher growth and profitability. In 1960, bedding components represented nearly 100% of LEG’s sales. In 2014, the company’s revenue from bedding was just 21% of sales, underscoring LEG’s expansion into adjacent markets over the last 50 years.