Alcoa (AA) is planning on buying aerospace provider Firth Rixon for $2.85 billion. This furthers the company's move toward so-called value added products. That's the same thing that Leggett & Platt (LEG -1.76%) is doing, only it's shares aren't up nearly 100% over the past 12 months.
Looking for margin
Alcoa has been trying to change itself into a specialty products company. It's a big shift that's taken Alcoa from simply making and selling a commodity metal to turning a commodity product into high-end products that it sells directly.
In 2013, such specialty products made up roughly 57% of Alcoa's revenues. And, more important, the allure of this shift is that these offerings carry higher margins. For example, despite the top-line contribution, specialty products made up about 80% of profits. Clearly, this group is doing the heavy lifting at Alcoa.
Aloca got about 30% of its so-called value added revenues from the aerospace market in 2013. This group makes structures, fasteners, and engine parts. The Firth Rixon acquisition is expected to increase the revenues of this sub-segment by roughly 20% and further increase Alcoa's market share in the jet engine sector.
Better yet, Firth Rixon has long-term agreements in place that should keep its sales growing at 12% annually through 2019. So not only is Alcoa buying a company that extends its market share in a key end market, but it's also buying locked in growth. Looking at the bigger picture, Alcoa's corporate makeover is progressing well and investors are taking notice, sending its shares roughly 90% higher over the past 12 months.
Similar moves, less attention
Alcoa, however, isn't the only company looking to get in on the specialty shift or the aerospace market. Another metal fabricator doing the same thing is Leggett & Platt. Best known for making bed springs, Leggett & Platt has been working to get out of stagnant businesses and into fast growing ones. That's included buying aerospace tubing manufacturer Western Pneumatic Tubing in early 2012 for roughly $200 million. Leggett & Platt has used that platform as a base from which to grow. For example, it added a small U.K. aerospace tubing maker in mid-2013.
Now it's hard to compare $17.5 billion market cap Alcoa with Leggett & Platt, which weighs in at around $4.7 billion—less than a third the size. And Aloca's nearly $3 billion purchase is clearly more dramatic than Leggett & Platt's $200 million "spending spree." However, the deals have much in common.
Alcoa's specialty products account for a disproportionate share of the aluminum giant's earnings because they offer higher margins than its legacy businesses. Leggett & Platt, which has been selling older, stagnant businesses at the same time as it's been looking to expand, has managed to increase its EBIT margin from around 7% in 2008 to roughly 10% last year.
Although three percentage points may not sound like a big deal, it's a 40% improvement. And while the top line has been roughly static for three years, adding more profitable businesses to the mix has allowed Leggett & Platt to maintain its impressive record of dividend hikes. That streak now stands at over 40 years.
(Source: Jon Sullivan, via Wikimedia Commons)
It's worth noting that last year's results were affected by a write-off associated with a division earmarked for disposition, taking the bottom line lower year over year. In fact, the changes taking place at Leggett & Platt as it tries to shift its business mix have created a lot of noise in the company's financials. What's clear, however, is that, like Alcoa, Leggett & Platt is looking to get bigger in specialty markets. And, if you dig a little, it's delivering on that goal.
Riskier, but still under the radar
Alcoa's transformation has been noticed; that's why the shares have nearly doubled over the past year. Leggett & Platt, on the other hand, hasn't received the same attention despite working toward the same goal. If you can handle a little uncertainty, Leggett's 3.5% or so yield will pay you to wait for the market to notice the success its achieving.
