Interface, Inc.: Laying Out the Red Carpet

Jul.16.07 | About: Interface Inc. (TILE)

Interface, Inc. (IFSIA) goes underfoot and around the office with modular carpet and office panel and upholstery fabrics. The company, which puts an emphasis on environmentally friendly production, is the world's #1 producer of commercial carpets. Interface markets its modular (tiles and rolls) and broadloom carpets under such names as Heuga, Interface, and Bentley Prince Street. The company also makes interior panel fabrics for office furniture, including cubicles. Interface sells its products in more than 100 countries, with the US accounting for about 57% of sales. The company exited its US raised/access flooring business and its Re:Source service operation in 2004 in order to focus on its core carpet business lines.

This company is about to increase earnings dramatically. Over the last 5 years, earnings have averaged a negative 1% a year on sales that were down each year, on average, by 5.5% a year. Now analysts are looking for sales to increase, on average, by 6% a year, while earnings grow by 27% a year, on average over the next 5 years.

The reasons for the turnaround? First, the market segments Interface serves are doing very well. Office buildings are one of the hottest sectors of the real estate world. That's domestically and abroad. Eastern Europe is one of the company's strongest markets. Asia is booming as well.

Second, new markets are opening. Modular carpeting is covering more floor space in the hospitality, education, retail and healthcare industries due to its ease of installation and ease of maintenance. Replacement of a few soiled tiles is much easier than taking out the whole carpet, wall to wall, and putting in a new one.

Third, the the company sold its losing subsidiary, the domestic fabrics business. IFSIA sold its European fabrics division in April of last year. In 2006, the group had revenues of $161 million but still had an operating loss. Once gone, earnings should improve by 5 cents to 8 cents a share.

Investors figured this story out a couple of years ago, when the stock hit a bottom of $2.50 a share in early 2003. Since then, the price has been on a strong upward trend and now trades close to its old all time high of $22.90, set in 1998. In the last year alone, the price has increased by 75%. But there's reason to believe it might keep going.

Those earnings projections of 27% annual growth are well below the company's forward P/E of 20. Earnings per share are forecast at 90 cents this year and $1.15 next year. Last year they were 63 cents a share. Also, Return on Equity was 12.8% last year, expected to be 19.5% this year and 19% next year. Current assets are 3 times current liabilities with $65 million in cash in the treasury. One more important plus: officers and directors own 75% of the voting stock. That always means they'll be voting like shareholders, seeking the best for the company since their wealth comes from owning stock.

Two negatives: the new markets are attracting competition. While Interface is already gearing up for more modular production (it closed a plant in Thailand last quarter to increase capacity), other large carpet makers aren't sitting back and watching sales flow to IFSIA. Look for increased offering from major brands as this market continues to expand. Also, debt is about 63% of the balance sheet.

IFSIA 1-yr chart


Disclosure: none