Steelcase's Mixed Q3 Report Has Sent Its Shares Lower, Should You Consider A Long-Term Position?

| About: Steelcase Inc. (SCS)
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Summary

Q3 2015 earnings were released on December 22.

Earnings per share beat expectations and revenue fell short.

Returned $14 million to shareholders via dividends and share repurchases.

The stock has reacted by falling.

Steelcase Inc. (NYSE: SCS), one of the world's leading providers of workplace products, furnishings, and services, released third quarter earnings after the market closed on December 22, with earnings per share beating expectations and revenue falling short, and its stock has reacted by falling more than 4%. Let's take a closer look at the results and the company's outlook on the fourth quarter to determine if we should use this weakness as a long-term buying opportunity or a warning sign to stay away.

Breaking Down The Mixed Results

Here's a summary of Steelcase's third quarter earnings compared to what analysts had expected and its results in the year-ago period:

Metric Reported Expected Year Ago
Earnings Per Share $0.29 $0.26 $0.29
Revenue $800.0 million $826.8 million $784.8 million

Steelcase's adjusted earnings per share remained unchanged and its revenue increased 1.9% compared to the third quarter of fiscal 2014, driven by organic sales rising 3%. Here's a breakdown of the company's revenues and revenue growth by segment (in millions):

Segment Q3 2015 Q3 2014 Change
Americas $555.3 $558.5 (0.6%)
EMEA $171.5 $158.0 8.5%
Other $73.2 $68.3 7.2%
Total $800.0 $784.8 1.9%

Excluding certain items, Steelcase's gross profit increased 3% to $251 million and its operating profit increased 4.1% to $56.1 million, as its gross margin expanded 30 basis points to 31.4% and its operating margin expanded 20 basis points to 7%; these strong results can be attributed to costs of sales increasing just 1.5%, which was outpaced by the company's 1.9% revenue growth.

For the quarter, Steelcase generated $23.7 million in net cash provided by operations and invested $24.7 million in capital expenditures, resulting in negative free cash flow for the quarter. Fortunately, the company began the quarter with $155.7 million of cash and cash equivalents on its balance sheet, which it utilized to pay $13 million in dividends and repurchase $1 million worth of its common stock. Steelcase ended the quarter with $128.8 million in cash and cash equivalents, so it could accelerate repurchases or raise its dividend in the fourth quarter.

Lastly, Steelcase provided its outlook on the fourth quarter, calling for the following performance:

  • Adjusted earnings per share in the range of $0.19-$0.23, an increase of 5.6%-27.8% from the $0.18 earned in the year ago period.
  • Adjusted revenue in the range of $760 million-$785 million, a decrease of 2.5% to an increase of 0.7% from the $779.4 million reported in the year ago period.

Fortunately, this outlook came in line with analysts' expectations for the fourth quarter, which currently call for earnings per share of $0.20 and revenue of $774.30 million.

Should You Buy Steelcase On The Dip?

Steelcase Inc. is a leading provider of workplace products, furnishings, and services worldwide, but lack of demand for its offerings led it to a weak third quarter performance; the company's earnings per share remained unchanged from the year-ago period and its revenue increased just 1.9%, and its stock has reacted to these results by falling more than 4%.

Even though the third quarter was very weak, I think the decline in Steelcase's stock represents a great long-term buying opportunity, because it trades at very inexpensive forward valuations, including less than 14.6 times fiscal 2016's estimated earnings per share of $1.15 and a mere 12 times fiscal 2017's estimated earnings per share of $1.39. In addition, the company pays an annual dividend of $0.42 per share, giving it a very respectable 2.5% yield at current levels. With all of this information in mind, I think long-term investors should strongly consider initiating positions in Steelcase and adding to them on any further weakness provided by the market.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.