Steelcase Inc (SCS): The Best Small Cap Office Furniture Stocks? HNI, KNL & VIRC

Small cap office furniture stock Steelcase Inc (NYSE: SCS) jumped 11.66% after beating earnings expectations, meaning it might be time to take a closer look at the stock along with potential office or commercial furniture stock peers like HNI Corp (NYSE: HNI), Knoll Inc (NYSE: KNL) and Virco Mfg. Corporation (NASDAQ: VIRC). After all, the performance of any company selling office or commercial furniture would tend to give some insights into the office or employment markets.

What is Steelcase Inc?

Founded in 1912, Steelcase's brands offer a comprehensive portfolio of workplace products, furnishings and services that are sold through a network of channels, including over 650 dealers. The company's brands include Steelcase®, Coalesse®, Designtex®, Details®, Nurture®, PolyVision® and Turnstone®.

As for potential office or commercial furniture stock peers, HNI Corp is the second largest office furniture manufacturer in the world and is also the nation's leading manufacturer and marketer of gas- and wood-burning fireplaces; Knoll Inc is recognized internationally for both workplace and residential designs; and Virco Mfg. Corporation is a leading manufacturer and supplier of furniture and equipment for K-12 schools.

What You Need to Know or Be Warned About Steelcase Inc

Yesterday after the market closed, Steelcase reported that fourth quarter revenue rose 8.0% to $779.4 million while net income came in at $23.9 million verses a net loss of $27.5 million (apparently due to some charges for the same period last year). For fiscal 2014, Steelcase reported $3.0 billion in revenue and net income of $87.7 million verses $2.9 billion in revenue and net income of $38.8 million. However, it should be noted that while the Americas and the Other category posted organic revenue growth of 5% and 2%, respectively, while EMEA experienced an 8% organic revenue decline for its third consecutive annual adjusted operating loss. The CFO did comment that: "We remain focused on the implementation of our multi-year strategy necessary to safeguard our global competitiveness and restore profitability in this region."

However and in the outlook or guidance, Steelcase noted that EMEA fourth quarter orders grew approximately 3% (driven by strength in February and improved orders from Germany) and customer order backlog at the end of the fourth quarter rose approximately 26% compared to the prior year – meaning there could be a recovery unfolding in Europe.

In the earnings call (whose transcript is available on Seeking Alpha here), management talked in detail about the EMEA situation and their efforts to turn the performance there around with the CFO commented:

Across manufacturing, we do not expect any significant benefits in 2015 related to the changes in the EMEA manufacturing footprint, as we do not believe they would be completed until late in the fiscal year. However, we do expect incremental operating costs and inefficiencies associated with these initiatives including the $5 million we estimate for the first quarter.

It also sounds like management expects a cyclical recovery in EMEA by 2016 or 2017.

The results along with the guidance led to Raymond James analysts Budd Bugatch and Bobby Griffin to upgrade Steelcase to Strong Buy (from Outperform) and to increase their 12-month target price to $19.00. They commented:

With strong management, diverse industry exposure, exciting new product introductions, and meaningful operating leverage, [Steelcase] is compelling for investors that want to benefit from the non-residential economic recovery. Given [Steelcase] underperformance YTD (SCS -8% vs ~0% for the SPX) we think it wise to use the recent lull as a buying opportunity.

Nevertheless, it should be mentioned that Steelcase has a trailing P/E of 58.56 and a forward P/E of 13.45 along with a forward dividend of $0.40 for a 2.7% dividend yield and a rather high 134% payout ratio according to Yahoo! Finance data – meaning its not exactly a bargain at the moment.

Share Performance: Steelcase Inc vs HNI, KNL, VIRC

On Wednesday, small cap Steelcase jumped 11.66% to $16.28 (SCS has a 52 week trading range of $12.16 to $16.95 a share) for a market cap of $2.02 billion plus the stock is up 2.5% since the start of the year, up 8.5% over the past year and up 226.2% over the past five years. Here is a look at the performance of small cap Steelcase verses HNI Corp, Knoll Inc and Virco Mfg. Corporation:

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As you can see from the above performance chart, school furniture maker Virco Mfg. Corporation has been an underperformer while the performance of Steelcase, HNI Corp and Knoll Inc have largely mirrored each other.

Finally, here is a look at the performance of all four office and commercial furniture stocks:

The Bottom Line. Given small cap Steelcase's run up after earnings along with its current P/E and rather high dividend payout ratio, it might be hard for new investors to justify jumping into the stock right now. But existing investors will have some piece of mind knowing the company expects improvement in the EMEA region.