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Raymond James Brief Reports On BIFMA
5.5.10 | St. Petersburg, FL | Investment analyst
Budd Bugatch of Raymond James & Associates
provided commentary on March office furniture order and shipment
statistics
released by the Business and Institutional Manufacturers
Association
(BIFMA).
BIFMA: March Orders +5%; Shipments -7%
Analyst(s): Budd Bugatch
>After Monday's market close, the Business and Institutional Furniture Manufacturers Association (BIFMA) released its market statistics for March 2010. The month's order and shipment statistics were derived from a sampling of 32 companies in the contract office furniture industry whose combined shipments make up about 73% of total industry volume.
>BIFMA estimates March orders increased 5%, the industry's first year-over-year incoming order improvement since July 2008. While the prior year comparison was modestly easier (-34% in March 2009 versus -32% in February 2009), on a two-year stack, March orders improved ~900 basis points relative to February. Importantly, prior year comparisons will remain pretty easy (down 30% or more) until November. Consistent with the 6% order decline reported last month, March shipments fell 7% (our tables show -6% due to rounding differences).
>The March data were encouraging and corroborated our view that the contract office furniture industry is in the process of bottoming. Typical seasonality would suggest some sequential acceleration in February and March relative to January. We have now had two consecutive months of larger than normal sequential percentage increases (+22% in February versus the 20 year average of +9% and +15% in March versus the 20 year average of +12%). Net-net, this implies normal seasonality is re-asserting itself, another encouraging sign that demand has troughed.
>Office furniture is a late cycle industry, typically lagging the broader economy by two or three quarters. While the industry's key economic drivers remain mixed, on balance, macro and industry-specific data points have continued to improve. To wit, the vast majority of first quarter earnings reports have handily exceeded analyst expectations and corporate profits are likely to record a second consecutive quarter of year-over-year growth. Broadly speaking, companies have de-leveraged their balance sheets, and business confidence continues to stair-step higher. While the unemployment rate remains elevated, the economy has begun to add jobs, albeit at a modest pace. According to the Bureau of Labor Statistics, service-providing payrolls increased by 44,000, 33,000, and 121,000 in January, February, and March, respectively.
>While weakness in commercial construction is likely to remain a drag on project-related business for the foreseeable future, we believe the high national vacancy rate (17.2% in 1Q10 versus 17.0% in 4Q09 and 15.2% last year, according to Reis) suggests the initial recovery may be driven more by absorption of existing space, and be less dependent on new office construction. That said, the Architect's Billing Index (which tends to lead non-residential construction by 9 to 12 months) improved to 46.1 in March, up from 44.8 last month. While this marks the index's 26th consecutive month below 50 (the line of demarcation between expansion and contraction), the index is significantly improved relative to its trough of 33.9 in January 2009.
>Bolstering our investment case, each of our office furniture equities under coverage are well-managed and high quality -- with solid balance sheets, favorable cash flow dynamics, and individual competitive strengths. With typical operating income contribution margins ranging from 30% to 40%, these companies boast attractive earnings leverage to incremental sales. While the stocks have rebounded significantly from their March 2009 lows, we believe we are at the headwaters of multiple years of revenue growth and margin expansion and would prefer to own shares now (potentially enduring some near-term volatility) rather than risk missing out on the cycle.
>According to BIFMA, March orders were $675 million, up 5% versus $645 million last year and up 15% compared with $585 million in February. Estimated trailing 12-month orders were $7.595 billion, down 25.4% year-over-year. This marks the first sequential uptick in the dollar value of trailing 12-month orders since July 2008 and the smallest year-over-year percentage decline in eight months.
>BIFMA estimates that March shipments decreased 7% year-over-year to $595 million, up from $550 million last month. Trailing 12-month shipments fell 26.8% year-over-year to an estimated $7.635 billion, the third consecutive month of modest sequential improvement in the rate of decline.
>March unfilled order backlog fell 8.9% year-over-year to $1.025 billion, up sequentially from $940 million in February and marking the smallest year-over-year percentage decline since October 2008.
>With regard to the office furniture equities under coverage by Raymond James, we reaffirm our Market Perform rating on Herman Miller. While we admire Herman Miller for its excellent management, innovative design, high-quality products, and lean manufacturing, the shares trade at 24.1x the forward consensus EPS estimate, a premium to Knoll despite lower operating margins and likely a modestly lower contribution margin.
>We also reaffirm our Strong Buy rating on Knoll. Knoll is a well-managed enterprise, in our view, that generates significant free cash flow, which management has used to de-leverage the balance sheet and return capital to shareholders through dividends and stock buybacks. We believe that Knoll's focus on higher-end products with high design content lends itself to attractive profit margins and better maintenance of pricing power. In FY09, benefits from cost-saving actions and lower commodity costs have been a benefit to margins, partially offsetting de-leverage from lower volumes. Knoll trades at 0.9x sales (in-line with peers despite industry-leading operating margins) and 19.5x forward consensus earnings- below the peer median forward P/E.
>We also reaffirm our Strong Buy rating on Steelcase. Steelcase is the global market share leader in the contract office furniture industry. We believe the company offers investors a diversified play on an industry recovery given its broad exposure to product categories, price points, vertical markets, and geographies. At 0.5x, Steelcase trades at the lowest price-to-sales multiple in the group, and at a discount to its historical median of 0.7x. In our view, investors have been less willing to afford Steelcase a higher valuation given the company's below-peer margins in recent years. On the other hand, this also suggests the company has more margin "runway" and could ultimately benefit from both improved EPS and higher valuation metrics.
>We also reaffirm our Outperform rating on HNI Corp. HNI is the #2 player in the worldwide office furniture market (83% of sales) and the market leader in hearth products (17% of sales). HNI comes to market with the broadest product offering across price points and product lines, and serves all the major channels in the office furniture market. HNI's hearth products segment serves the new construction (45% of hearth sales) and remodel/retrofit channels. In response to challenging demand levels, HNI reduced structural costs by over $150 million in 2009, through manufacturing consolidations, restructured logistics systems, the exit of small non-core businesses, numerous manufacturing in-sourcing initiatives, and other SG&A actions. Given their exposure to small business and retail consumers, we believe HNI sales are likely to lead peers in the early stages of recovery. HNI trades at 0.9x sales, in-line with the peer median- although it offers an attractive 2.8% dividend yield.
BIFMA: March Orders +5%; Shipments -7%
Analyst(s): Budd Bugatch
>After Monday's market close, the Business and Institutional Furniture Manufacturers Association (BIFMA) released its market statistics for March 2010. The month's order and shipment statistics were derived from a sampling of 32 companies in the contract office furniture industry whose combined shipments make up about 73% of total industry volume.
>BIFMA estimates March orders increased 5%, the industry's first year-over-year incoming order improvement since July 2008. While the prior year comparison was modestly easier (-34% in March 2009 versus -32% in February 2009), on a two-year stack, March orders improved ~900 basis points relative to February. Importantly, prior year comparisons will remain pretty easy (down 30% or more) until November. Consistent with the 6% order decline reported last month, March shipments fell 7% (our tables show -6% due to rounding differences).
>The March data were encouraging and corroborated our view that the contract office furniture industry is in the process of bottoming. Typical seasonality would suggest some sequential acceleration in February and March relative to January. We have now had two consecutive months of larger than normal sequential percentage increases (+22% in February versus the 20 year average of +9% and +15% in March versus the 20 year average of +12%). Net-net, this implies normal seasonality is re-asserting itself, another encouraging sign that demand has troughed.
>Office furniture is a late cycle industry, typically lagging the broader economy by two or three quarters. While the industry's key economic drivers remain mixed, on balance, macro and industry-specific data points have continued to improve. To wit, the vast majority of first quarter earnings reports have handily exceeded analyst expectations and corporate profits are likely to record a second consecutive quarter of year-over-year growth. Broadly speaking, companies have de-leveraged their balance sheets, and business confidence continues to stair-step higher. While the unemployment rate remains elevated, the economy has begun to add jobs, albeit at a modest pace. According to the Bureau of Labor Statistics, service-providing payrolls increased by 44,000, 33,000, and 121,000 in January, February, and March, respectively.
>While weakness in commercial construction is likely to remain a drag on project-related business for the foreseeable future, we believe the high national vacancy rate (17.2% in 1Q10 versus 17.0% in 4Q09 and 15.2% last year, according to Reis) suggests the initial recovery may be driven more by absorption of existing space, and be less dependent on new office construction. That said, the Architect's Billing Index (which tends to lead non-residential construction by 9 to 12 months) improved to 46.1 in March, up from 44.8 last month. While this marks the index's 26th consecutive month below 50 (the line of demarcation between expansion and contraction), the index is significantly improved relative to its trough of 33.9 in January 2009.
>Bolstering our investment case, each of our office furniture equities under coverage are well-managed and high quality -- with solid balance sheets, favorable cash flow dynamics, and individual competitive strengths. With typical operating income contribution margins ranging from 30% to 40%, these companies boast attractive earnings leverage to incremental sales. While the stocks have rebounded significantly from their March 2009 lows, we believe we are at the headwaters of multiple years of revenue growth and margin expansion and would prefer to own shares now (potentially enduring some near-term volatility) rather than risk missing out on the cycle.
>According to BIFMA, March orders were $675 million, up 5% versus $645 million last year and up 15% compared with $585 million in February. Estimated trailing 12-month orders were $7.595 billion, down 25.4% year-over-year. This marks the first sequential uptick in the dollar value of trailing 12-month orders since July 2008 and the smallest year-over-year percentage decline in eight months.
>BIFMA estimates that March shipments decreased 7% year-over-year to $595 million, up from $550 million last month. Trailing 12-month shipments fell 26.8% year-over-year to an estimated $7.635 billion, the third consecutive month of modest sequential improvement in the rate of decline.
>March unfilled order backlog fell 8.9% year-over-year to $1.025 billion, up sequentially from $940 million in February and marking the smallest year-over-year percentage decline since October 2008.
>With regard to the office furniture equities under coverage by Raymond James, we reaffirm our Market Perform rating on Herman Miller. While we admire Herman Miller for its excellent management, innovative design, high-quality products, and lean manufacturing, the shares trade at 24.1x the forward consensus EPS estimate, a premium to Knoll despite lower operating margins and likely a modestly lower contribution margin.
>We also reaffirm our Strong Buy rating on Knoll. Knoll is a well-managed enterprise, in our view, that generates significant free cash flow, which management has used to de-leverage the balance sheet and return capital to shareholders through dividends and stock buybacks. We believe that Knoll's focus on higher-end products with high design content lends itself to attractive profit margins and better maintenance of pricing power. In FY09, benefits from cost-saving actions and lower commodity costs have been a benefit to margins, partially offsetting de-leverage from lower volumes. Knoll trades at 0.9x sales (in-line with peers despite industry-leading operating margins) and 19.5x forward consensus earnings- below the peer median forward P/E.
>We also reaffirm our Strong Buy rating on Steelcase. Steelcase is the global market share leader in the contract office furniture industry. We believe the company offers investors a diversified play on an industry recovery given its broad exposure to product categories, price points, vertical markets, and geographies. At 0.5x, Steelcase trades at the lowest price-to-sales multiple in the group, and at a discount to its historical median of 0.7x. In our view, investors have been less willing to afford Steelcase a higher valuation given the company's below-peer margins in recent years. On the other hand, this also suggests the company has more margin "runway" and could ultimately benefit from both improved EPS and higher valuation metrics.
>We also reaffirm our Outperform rating on HNI Corp. HNI is the #2 player in the worldwide office furniture market (83% of sales) and the market leader in hearth products (17% of sales). HNI comes to market with the broadest product offering across price points and product lines, and serves all the major channels in the office furniture market. HNI's hearth products segment serves the new construction (45% of hearth sales) and remodel/retrofit channels. In response to challenging demand levels, HNI reduced structural costs by over $150 million in 2009, through manufacturing consolidations, restructured logistics systems, the exit of small non-core businesses, numerous manufacturing in-sourcing initiatives, and other SG&A actions. Given their exposure to small business and retail consumers, we believe HNI sales are likely to lead peers in the early stages of recovery. HNI trades at 0.9x sales, in-line with the peer median- although it offers an attractive 2.8% dividend yield.
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