If I were to ask you to name me a company growing earnings at 500% year-over-year, return on invested capital at +16%, EPS growth quarter-over-quarter of +33% and ROE at +25%, which company would you choose?
I previously posed a similar question with impressive metrics in a previous article seen here, and the answer to this question was none other than good ol' boring Unilever (UL). In this case, many of you might guess a high flying technology company or biopharmaceutical company but the owner of these impressive metrics is none other than Herman Miller Inc. (NASDAQ: MLHR): a global provider of office furniture and fixtures for educational, commercial and healthcare providers.
What is the bull case for Herman Miller Inc.?
The story for Herman is based on 3 main drivers: effective working capital management; investments in productivity and innovation; robust growth in its operating markets. In its most recent quarter, the company saw EPS at 54 cents per share and beat expectations by 21% and realized revenue of $565.4 million. Over 58% of the company's revenues is in North America with Adjusted EBITDA at $235 million on $2.14 billion in revenue. The company has grown gross margins by over 9% over the last 3 years. Operating margins have grown by 5% over the last 12 months and cash flow growth has seen an unprecedented surge: operating cash flow year-over-year growth is up +86% while free cash flow has grown over 111% in 2015. Despite trading at roughly 13.44 forward PE, a PEG ratio at 1.01 and a paltry 0.83 price-to-sales ratio, the company is expected to grow EPS by over 10% next year while continuing to invest in innovation and product development: 22% of the company's revenues were generated from products created the last 4 years and introduced over 40 new products in 2015. The company has grown book value per share by nearly 3.5x over the last ten years. Technically speaking, the company is in good footing since its earnings results: the stock is trading above both 50 and 200 SMA while forming an upward wedge since that earnings call in September (see Figure 1).
Figure 1
On a valuation basis, the company is below intrinsic value. At a 3.2% terminal FCF growth rate and WACC at 9% (Figure 2) the company is trading at roughly a 38.8% discount, for a total enterprise value at $2.756 billion. This is assuming 5% - 6% revenue growth over the next two years (revenue in its latest quarter increased 10.93% year-over-year and sales in 2015 have grown 13.83% with a 3 year average growth rate at 7.51%). The company pays a solid dividend at 1.94% and with a payout ratio of only 25.90%, there is plenty of room for growth for dividend growth investors.
Figure 2
Despite these interesting financial metrics, what exactly are the growth catalysts for Herman Miller Inc.?
The company is seeing interesting market catalysts within the construction market with year-over-year expected growth within non-residential, commercial and office space of 8.2%, 10.6% and 11.7%, respectively. The company is seeing strong operating metrics of 6.8% CAGR in net sales from FY11 - FY15 with ROIC from FY12 - FY16Q1 at above 23%. Organically, the company is seeing very robust growth with FY16Q1 net sales rising 8% and orders up 7%. Adjusted operating income as a percentage of sales has also increased 27.6% from FY15Q3 - FY16Q1. Finally, the company is seeing strong gross margin growth from 37.5% to 38% for FY16Q2, primarily from strong execution and new innovations within their catalog of products.
The company has also seen drastic improvements by utilizing new management models to enhance productivity. Herman Miller has put forth a design company focused on the "Lean Enterprise" and the proof is in the pudding. Since FY10, the company has seen a 54% increase in sales per operational square foot, a 23% increase in sales per employee and a 50% increase in tangible asset turnover which have drastically improved margins over a short period of time. The company has seen turmoil in the markets, especially during the Great Recession of 2009. As seen in Figure 3, the company has been quite jumpy (not even able to beat the Dow over a 18 year period) despite being a consistent dividend payer. The company has seen sales peak in 2008 at $2.012 billion and it never recovered above the $2 billion mark until 2015. The company has a very good balance sheet with very little debt so I don't believe interest rate increases will create significant monetary headwinds for the company, but slower growth in Europe and Asia from any Fed movement could slow organic growth down.
Figure 3
Regardless of these headwinds, I believe Herman Miller is poised to breakout from an excellent quarter well into the new year. My price target on the stock is $44.90 by mid next year.
