Wednesday, March 18, 2009

It's Miller Time

Disclosure: I own shares of Herman Miller.

Herman Miller reports Q3 earnings today after the close. The company has been taking a lot of actions recently to handle the downturn in the economy. The office furniture industry has been hurt right along with it. The company recently announced a reduction in hours and pay by 10%. Some workers will be required to take every other Friday off to help reduce costs. Not only are the employees taking pay cuts, but the executives will be taking a 10% pay cut as well, with Brian Walker (CEO) taking his 2nd pay cut in 3 months. The company will also be suspending matching 401k contributions until the environment improves [1].

Handling a 1-2 punch
The company has faced two nasty blows over the past year. The first occurred during the 2008 commodity price run. Faced with higher input costs from steel to plastics, the company managed their costs well employing lean manufacturing programs to help reduce costs, while also increasing prices on some of their product lines. They emerged from 2008 with 12% operating margins.

Now comes the 2nd punch which is much harder to handle, the falling demand for their products. The company doesn’t have much choice here other than to take the blow to the gut. The company’s response is in line with every other company, layoffs and cost cutting measures.

Even with a bleak economic outlook, the company does have a good track record of managing costs keeping expenses level relative to their revenues. Gross profit margins have run at a healthy 33% over the past 10 years, while their selling, general, and administrative expenses average about 20% of revenues. The results are operating margins that average over 8%.

Office Furniture Industry takes a hit
The Business and Institutional Furniture Manufacturer’s Association (BIFMA) recently reported their projections for office furniture shipments would drop 19% in 2009 compared to 2008, while orders are expected to drop 25% for the same time period [2]. I used these forecast to try and “re-value” Herman Miller.

Herman Miller’s valuation
There is no question that there are tough times ahead for Herman Miller. After taking the latest BIFMA projections, I have them valued within the $12 to 15$ range. The stock closed yesterday at $9.71/share. The valuation looks good, but the environment does not. Besides keeping an eye on overall economic and credit conditions, the key measure to monitor is office vacancies within the US. The second measurement will be how the economic situation in other parts of the world performs. 23% of Herman Miller’s earnings before interest and taxes come from foreign customers. It was a good growth play a few years ago, and a way to diversify their business, but now that segment will hurt.

I’ll talk more about Herman Miller’s long term prospects after the earnings call tomorrow. Stay tuned.

References
1. Herman Miller CEO Brian Walker takes his second pay cut in 3 months.

2. Furniture Industry Braces for a challenging year.

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