Kimball: Inflection Point +30% Sales Quarter, Above Estimates, 3.8% Dividend, 8.5x P/E

Summary

  • + 31% sales growth, led by +52% in Workplace, +94% in recently acquired Poppin.
  • Stock rebounds +23% on result, we still see further 90% upside.
  • 3.8% Dividend Yield.
  • The company is trading at P/E of 8.5x, stock down -56% from prior pre-Covid levels.
  • Workplace and Health segment orders rose 28.6% YoY.
Modern Office Space With Waiting Room, Board Room And Cityscape Background

onurdongel/E+ via Getty Images

3Q Results

Kimball (NASDAQ:KBAL) reported their third quarter results for the quarter ended March [the company operates on a June fiscal year end]. With a very strong quarter, which surpassed Street expectations, the company is finally at an inflection point, in our opinion. The company announced quarterly sales of $181 million, which was 5.3% more than the analyst average expectation of $172 million. This represents a 30.5% increase over the $139 million in sales during the same period last year which is driven by continued strength in the Workplace and Health end markets and 94% growth at recently acquired Poppin. The company reported EPS of $0.21, up 800% from losses of $(0.03) per share in the same time prior year. Price increases and continuous cost-cutting efforts offset sustained pressure from raw material inflation, higher freight, and labor expenses, resulting in an increase in gross margin of 180 basis points to 30.5% YoY.

The highlights of the quarter were Kimball’s Workplace and Health market divisions that delivered 41% YoY revenue growth and represented over 81% in fourth quarter revenues. Workplace and Health segment orders rose 28.6% YoY.

Table

Press Release

As we can see, sales from the workplace segment have increased by 52% which indicates that the effects of Covid-19 disturbances are getting "normalized". This supports our thesis of ‘work from office beats out other forms of work.’ We believe the company reached an inflection point at the end of the third quarter, and we expect higher volumes and pricing to outpace inflationary pressures in the fourth quarter, resulting in a significant sequential increase in gross margin.

Growth Outlook

The third quarter's results and order rates put the company in a strong position to meet revenue targets for 2022 while also improving profitability. Given the importance of product designs to cooperation and culture-building, we expect positive demand trends to continue until fiscal 2023. Kimball International is well-positioned for long-term growth, with a portfolio geared to the booming Workplace and Health end markets, significant traction in eCommerce, and a presence in new geographies. According to the company's guidance, revenue of $180-$185 million and gross margin of 32.5%-31.5% are expected. The adjusted S&A guidance range is $52-$54 million. We are estimating EPS to be $0.15 for 2022 and with increasing demand we are estimating EPS to be $1.10 for 2023.

Table

Press Release

Kimball: Recovery at last, cheap valuations

Kimball’s stock has declined since our initial June 2020 recommendation, and we have clearly been, in hindsight, too early on this stock. Unexpected new variations of Covid have also pushed out the recovery for not just Kimball, but also the global economy. But we now think that recovery is occurring for Kimball, finally. We see favorable risk-reward at this point and an “unlock and recovery” as things start to improve and reach normalcy to pre-Covid times.

Kimball still looks relatively inexpensive, trading at 8.5x P/E for the FY06/2023e compared to valuations of the S&P 500 and S&P Small-Cap index trading at 21.9x and 16.7x P/E on 2022 consensus forecasts, respectively. The stock also has minimal downside risk in our view, and this makes it attractive, as it has been stagnant since April of last year [prior to the post-earnings bounce]. As the Workplace and Health sectors for this company are ramping up, delivering robust revenue levels and order growth, things look promising. Full recovery is likely in the cards, with the Poppin acquisition reaching pre-pandemic levels in terms of sales by the end of the fourth quarter of this year. Given this, we maintain our price target of $18.00, which leads us to an upside of over 91.7% on today’s current stock price.

Target Price and Valuation

Since the stock hasn’t moved much since our previously published report, we value Kimball with the same price target as before. What makes it attractive from an investor’s standpoint is that it has minimal downside risk and great room for upside. If you look at the chart below, the stock hasn’t done much, and it has just been stagnating since April 2020.

Kimball, at this point and going forward, looks to be a typical “unlock and recovery” trade, with its main end-market Workplace starting to show a healthy recovery in furniture sales by 2H of this year. The company has attractive valuations which makes it even more compelling to get invested at this point, with a P/E of 8.5x on FY23e and a steady-state dividend yield of 3.8%. It should also be noted that the current price is down over -56% since pre-pandemic highs of $21.67, which is a very attractive entry point, in our view.

Chart

Bloomberg

We see Kimball having an upside of 91.7%, with our price target of $18.00. Kimball did a buyback over three years of 2.7 million shares, or 7% of shares outstanding, and looks to effectively resume its share repurchase program. This makes the stock even more attractive as there is potential for overall earnings to improve via EPS gains.

At today's current stock price, based on our steady-state FY06/2023 estimates, the stock is trading at 8.5x P/E.

Price Target: $18.00

Our short-term price target of $18.00 is based on a P/E of 16.4x and an EPS estimate of $1.10 on steady-state FY06/2023. Our price target of $18.00 represents a 91.7% potential upside.

Work from Office Beats out Other Forms of Work

There has long been a debate between working from home and/or hybrid or working from the office. To those proponents in support of work from home, behavioral economics and psychology professor Dan Ariely from Duke University has a different view. Having studied and seen social behavior and the nature of human interaction, he has been able to deduce that people’s natural tendency is that they want to collaborate and be in the same room with one another.

This will lead workers to see the benefits of being in a workplace again. Workers can’t stand to be in isolation from one another, working from the comfort of their homes through online settings for long – it just doesn’t work too long. Even hybrid weeks do take into account shortened workweeks, because people realize that being physically present in a workplace is crucial, and it does make a difference in the way a person functions. In his article, Dan quotes on CNBC that “in-person work can be helpful for personal interaction and company collaboration, which can be hindered in a virtual world, a point many CEOs have made in explaining why they want workers to return.”

According to a recent survey from employment background check company GoodHire, out of 3,500 American managers, about 77% of managers said they’d be willing to implement “severe consequences”, including firing workers or cutting pay and benefits, on those who refuse to return to the office.

Conclusion

Things look good for Kimball with increasing orders in the 2H of this calendar year. Needless to say, things are slowly improving for this commercial furniture manufacturer. People are quickly returning to the office, and we really believe that this is an “unlock and recovery”. Workplace and Health segments have improved in this latest quarter results with both contributing 81% of total revenues. We believe the company reached an inflection point at the end of the third quarter, and we expect higher volumes and pricing to outpace inflationary pressures in the fourth quarter, resulting in a significant sequential increase in gross margin. With minimal downside, we think that this is an opportune time to get invested in Kimball stock.

This article was written by

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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