Modernized Workspace Demand And ERP Implementation Will Transform Operations

Key Takeaways

• Strong demand for modernized workspaces and growth in education and healthcare sectors supports potential revenue growth.
  
• Implementing operational efficiencies and new technologies aims to reduce costs and improve competitiveness, boosting margins and earnings.
  
• Steelcase's focus on large clients and international expansion faces challenges from economic uncertainties, tariffs, operational risks, and cost structure adjustments, impacting profitability.

Catalysts

Provides a portfolio of furniture and architectural products and services in the United States and internationally.

• Strong order growth from large corporate and government customers, driven by increasing demand for modernized workspaces, indicates potential future revenue growth. This is supported by an observed increase in U.S. office leasing activity.
  
• Implementation of new technologies and operational efficiencies, such as in-sourcing select product lines and optimizing the distribution network, is likely to improve net margins by reducing operational costs and increasing efficiency.
  
• The development and upcoming implementation of a new ERP system by 2026 aims to streamline processes and enhance capabilities, which can result in improved earnings through increased operational efficiencies and competitive advantage.
  
• Strategic focus on expanding market reach, with growth observed in specific segments like education and healthcare, suggests potential for continued revenue growth, as these sectors are poised for expansion due to demographic trends and infrastructure investments.
  
• Pricing actions, including a tariff recovery charge, are intended to offset inflationary and tariff-related costs, which could help in maintaining or improving net margins and thereby support stable or improved earnings.

Steelcase Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Steelcase's revenue will grow by 3.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.8% today to 4.5% in 3 years time.
• Analysts expect earnings to reach $157.2 million (and earnings per share of $1.32) by about April 2028, up from $120.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.2x on those 2028 earnings, up from 9.1x today. This future PE is lower than the current PE for the US Commercial Services industry at 29.0x.
• Analysts expect the number of shares outstanding to grow by 3.04% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.47%, as per the Simply Wall St company report.

Steelcase Future Earnings Per Share Growth

Risks

• Steelcase's reliance on large corporate and government customers, who tend to have lower gross margins, could impact profitability if this customer mix persists. This affects net margins.
  
• The company's international segment is subject to economic uncertainties, including weakness in key markets like Germany, France, and India, which could hamper revenue growth and overall earnings.
  
• Rising tariff costs and related global trade uncertainties may require pricing actions that could dampen demand, affecting revenue and operating margins.
  
• The implementation of a new ERP system may bring operational risks that could lead to unforeseen costs, impacting net margins and earnings.
  
• Adjustments in cost structures, particularly in the international and small to midsize business segments, indicate potential vulnerabilities that could affect profitability and earnings.

Valuation

• The analysts have a consensus price target of $16.5 for Steelcase based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.5 billion, earnings will come to $157.2 million, and it would be trading on a PE ratio of 16.2x, assuming you use a discount rate of 7.5%.
• Given the current share price of $9.71, the analyst price target of $16.5 is 41.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.