Steelcase (SCS) and Herman Miller (MLHR) operate in the furnishing sector, and have been facing pressure due to macroeconomic conditions. Steelcase outperformed analyst expectations in its last quarter's results, while MLHR missed EPS estimates, however, met revenue estimates. Both companies issued weaker outlooks for the next quarter, due to which, the stocks dipped, but are on their way to a recovery now. It is a good time to buy SCS as its management says that it has gained market share in the U.S. MLHR is also a good buy based on its potential to benefit, once the North American segment of its business improves with the economy. Income investors can benefit from the safe dividend yields that these companies have to offer.
General Housing and Furniture Market Trends:
The housing market is picking up, albeit slowly. For August, building permits were up 1%, which was below the July rate, but 24% above the figure for August last year. Housing starts for August were 750,000, 2.3% above July's starts, but below estimates of 767,000 units. Housing completions were also 0.7% above July. Forecasts show that housing starts will continue to increase.
According to the Business and Institutional Furniture Manufacturer's Association (BIFMA), consumption of the U.S. office furniture market was $11,131 million (12.7% above the 2010 level) in 2011. The U.S. production figure was $9,375 million, while the rest was met by imports. According to forecasts, consumption in 2012 is going to increase by 2.9% and by 3.6% in 2013. This is below the 2004-2007 average increase of 7.5%, but far above the -29% change in 2009. The future growth of furnishing in the U.S. (though slow) will benefit both these companies, as the largest chunks of their revenues come from the North-American region.
Steelcase, an office furniture and services provider, operates under the brand names Steelcase, Turnstone, Coalesse, Polyvision and Designtex. It also sells products to healthcare, retail and education sectors. It has operations in America, Middle East and Europe, while 71% of the revenues came from the Americas, in the last quarter.
The company posted EPS of $0.25, which was above analyst expectations of $0.19. Revenues came in at $745 million, which are $44 million more than last year, and above analyst expectations of $722 million. Revenues grew in all geographic areas except Asia Pacific. The shares were up 10% after the release of the Q2 FY2013 results.
For the next quarter, the company expects sales of $710-to-$735 million, while analysts currently expect revenues to grow by 0.4% to $722 million. EPS estimates of $0.16-to-$0.2 for Q3 FY2013 are below analyst expectations of $0.21. The company wants to focus on its most profitable American segment, in which it says, it has gained market share.
It has an impressive dividend yield of 3.7% with a payout ratio of 32% and levered free cash flow yield of around 5% (levered free cash flow of $66 million trailing twelve months). In 2007-08, the quarterly dividend per share was $0.15, compared to $0.09 now. As earnings grow, we can expect the dividend to increase in the future. The current share repurchase program has $136 million remaining to be used. This is 11% of the current market cap of $1.25 billion for SCS.
Like SCS, Herman Miller provides furnishing and services for business offices, healthcare, residential and educational sectors. It also derived 71% of its net sales from the North-American region.
The company gave a -2.5% earnings surprise by posting $0.38/share in Q1 FY2013, missing analyst estimates by 1 cent/share. Revenues of $450 million slightly exceeded analyst estimates of $449 million.
For the next quarter, Q2 FY2013, the company expects revenues in the range of $445-$465 million, and adjusted EPS in the range of $0.37-to-$0.41. Analysts now expect $454 million in revenues (5% growth over last year) and EPS of $0.39.
The company faced low demand in Europe, as can be expected given the economic conditions. International sales in Q1 FY2013 were still up 11.4% over the same period last year. The company plans to focus on its international (non-North American) segment to drive future growth. Specialty and consumer segment orders rose by 25.8% over the same quarter last year, in line with the company's vision. Sales from the North American segment were down 3%.
The company has a dividend yield of 1.9%, with a levered free cash flow yield of approximately 9% and a payout ratio of only 13%. The company's interest coverage ratio is seven times its earnings.
The past five-year average P/E for SCS is 23x, while MLHR's average is 16x. The trailing P/E for both is 16x. The table below gives the valuations, based on the 2014 expected EPS at trailing and forward P/E multiples:
Despite the weak macroeconomic situation, these companies have managed quite well. Steelcase in particular has shown strong financial performance in the last quarter, despite difficulties in the EMEA and Asia Pacific regions. MLHR will be a good buy, once the economy improves and demand picks up in North-America as well. Apart from the upside potential, both companies have impressive sustainable dividend yields for income investors. Both companies can be expected to perform better when the employment scenario and general economic conditions improve.