Leggett & Platt designs, manufactures, and sells engineered components and products used in a wide variety of settings including automobiles, offices, and homes. The company’s product lines include bedding, automotive seating, lumber systems, flooring, and office furniture.

The company’s diverse offering includes items such as steel rods, drawn wires, specialty foam chemicals, and structural fabrics. Its products are targeted toward bedding and mattress retailers, e-commerce retailers, department stores, construction companies, government agencies, and home improvement centers.

Amid an intensifying and competitive environment, Leggett has reduced its sales expectation for the current fiscal year, recently indicating a 7%-9% decline in year-over-year revenues. The downgrade is primarily due to weaker industry demand across various markets including flooring, textile products, and specialized furniture.

The Zacks Rundown

Leggett & Platt LEG, a Zacks Rank #5 (Strong Sell) stock, is a component of the Zacks Furniture industry group, which currently ranks in the bottom 24% out of approximately 250 Zacks Ranked Industries. As such, we expect this industry group as a whole to underperform the market over the next 3 to 6 months, just as it has over the past month:

Image Source: Zacks Investment Research

Stocks in the bottom tiers of industries can often be intriguing short candidates. While individual stocks have the ability to outperform even when they’re part of a lagging industry, the inclusion in a weaker group serves as a headwind for any potential rallies and the journey forward is that much more difficult.

Along with many other consumer discretionary stocks, LEG shares have been underperforming this year while the general market returned to new heights. The stock is hitting a series of lower lows and represents a compelling short opportunity as we head deeper into the fourth quarter.

Under its restructuring plan, Leggett dismissed its total shareholder return goal and other financial targets. The company cut its quarterly dividend back in the second quarter, reducing it to 5 cents from 44 cents a year earlier. A reduction in its dividend raises concerns for shareholders as the move signifies underlying financial instability.

Recent Earnings Misses & Deteriorating Outlook

Leggett & Platt has fallen short of earnings estimates in two of the past four quarters. Just last week, the company reported third-quarter earnings of $0.32/share, missing the $0.33/share Zacks Consensus Estimate by -3.03%. Consistently falling short of earnings estimates is a recipe for underperformance, and LEG is no exception.

The company has been on the receiving end of negative earnings estimate revisions as of late. Looking at the current quarter, analysts have slashed estimates by a whopping -20.69% in the past 60 days. The Q4 Zacks Consensus EPS Estimate is now $0.23/share, reflecting negative growth of -11.5% relative to the year-ago period.

Image Source: Zacks Investment Research

Falling earnings estimates are a huge red flag and need to be respected. Negative growth year-over-year is the type of trend that bears like to see.

Technical Outlook

As illustrated below, LEG stock is in a sustained downtrend. Notice how the stock has made a series of lower lows, widely underperforming the major indices. Also note that shares are trading below a downward-sloping 200-day average (red line) moving average – another good sign for the bears.

Image Source: StockCharts

LEG stock has experienced what is known as a “death cross,” whereby the stock’s 50-day moving average (blue line) crosses below its 200-day moving average. The stock would have to make an outsized move to the upside and show increasing earnings estimate revisions to warrant taking any long positions. Shares have fallen more than 50% this year alone.

Final Thoughts

A deteriorating fundamental and technical backdrop show that this stock is not set to make its way to new highs anytime soon. The fact that LEG is included in one of the worst-performing industry groups provides yet another headwind to a long list of concerns. A history of earnings misses and falling future earnings estimates will likely serve as a ceiling to any potential rallies, nurturing the stock’s downtrend.

Potential investors may want to give this stock the cold shoulder, or perhaps include it as part of a short or hedge strategy. Bulls will want to steer clear of LEG until the situation shows major signs of improvement.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Leggett & Platt, Incorporated (LEG) : Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research