The steel industry is highly cyclical and is currently in the downswing of a cycle. However, not all steel companies are alike. Some sell commodity products that compete on cost, others are highly specialized. Leggett & Platt (NYSE: LEG ) is so specialized that many people think of it as a bedding company—don't make that same mistake.
When it comes to steel, there are some basic varieties of products that get made. Sheet steel, steel beams, and reinforcement bars are all examples of things that industry heavyweight Nucor (NYSE: NUE ) produces. However, these are commodities. That's why the U.S. steel industry is constantly fighting steel imports.
According to Nucor, foreign imports made up nearly 25% of the U.S. steel market in 2012. China is a particular problem because it accounts for nearly half of the steel produced globally. Essentially, foreign steel companies may be receiving government subsidies that allow them to sell commodity steel products at artificially low prices, also known as dumping.
This is one of the reasons why Nucor has been working to produce more specialized steel products. For example, the company recently opened a flat-rolled steel processing plant that uses the Eco Pickled Surface pickling process. What does that mean? Nucor has differentiated itself by upgrading to an "environmentally friendly technology."
So the trend in the steel industry is toward more specialization. Leggett & Platt, however, has been onto this for years. The company is often associated with beds because it is one of the largest manufacturers of bed springs. But it also makes the parts that allow office chairs and other furniture to tilt and move. And it supplies display racks to retailers.
Leggett & Platt doesn't sound like a steel company at all, but at its heart, it is. Each of the above items is basically a specialized steel product. While a company like Nucor may have made the steel, Leggett & Platt refined it. The acquisition of Western Pneumatic Tube highlights the company's focus on specialization. Western manufactures tubing for "critical aircraft systems." You need a high quality product and regulatory clearance to sell into the aircraft market—you can't get more special than that.
But that's a far cry from bed springs, isn't it? Not really. Commenting on the acquisition, Leggett & Platt noted that it is "very comfortable with taking metal, modifying the geometry of the metal, welding the metal..." etc. Basically, the company's entire business is about the specialization of metal.
Leggett & Platt's business is still cyclical, but it is insulated from the extreme ups and downs that can result from selling purely commodity products. The company's stability is highlighted by its over 40 year history of annual dividend increases.
How important is specialization?
Industry giant ArcelorMittal (NYSE: MT ) has bled red ink for a year. Nucor and Leggett & Platt, on the other hand, have both remained profitable.
To be fair, ArcelorMittal is something of a different beast. For example, it uses a different steel production method than Nucor. It's also massive in size and scope, accounting for around 8% of the world's steel production. Its $27 billion market cap makes it almost 70% larger than Nucor; Leggett & Platt, at around $4 billion, looks like a runt in comparison.
But, with such scale comes an increased reliance on commodity products. There's no way around it, commodity markets are the only ponds large enough for ArcelorMittal to swim in. Leggett & Platt, meanwhile, is so small that it can pinpoint industries as obscure as office chair hinges.
Sleep well at night
Forgive the pun, but Leggett & Platt is truly the type of company you buy if you want to sleep well at night. And now is still a good time to jump aboard since it's yielding around 4%. You won't avoid the ups and downs of the economy, but Leggett & Platt has historically been much less volatile than either metal giant ArcelorMittal or increasingly specialized Nucor.
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