Strengthening Tech Orders And ERP Efficiencies Will Accelerate Revenue Growth And Margins

Key Takeaways

• Strong order trends from corporate and healthcare sectors, coupled with sustainability initiatives, are expected to drive revenue growth.
  
• New ERP system and cost restructuring efforts aim to improve operational efficiencies and net margins in the long term.
  
• Restructuring, international market challenges, ERP inefficiencies, supply chain risks, and potential tariffs threaten Steelcase's revenue, margins, and profitability.

Catalysts

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

• Steelcase is experiencing stronger order trends from large corporate customers, particularly in the technology sector, as expectations for in-office presence increase, which could boost revenue growth.
  
• The healthcare business shows promise due to strong demographics, and recent project wins suggest continued revenue growth from this segment.
  
• The implementation of a new ERP system is expected to enhance operational efficiencies and capture value, which will likely improve net margins and earnings starting in fiscal 2026.
  
• Steelcase's focus on sustainability and circularity, through initiatives such as remade services, could strengthen customer relationships and generate revenue by aligning with clients' carbon reduction goals.
  
• Restructuring actions and cost reductions in the International segment are projected to achieve $5 million in annualized savings, likely enhancing net margins as market conditions improve.

Steelcase Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Steelcase's revenue will grow by 2.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.5% today to 4.1% in 3 years time.
• Analysts expect earnings to reach $140.0 million (and earnings per share of $1.17) by about January 2028, up from $110.5 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.5x on those 2028 earnings, up from 11.5x today. This future PE is lower than the current PE for the US Commercial Services industry at 31.5x.
• Analysts expect the number of shares outstanding to grow by 1.86% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.38%, as per the Simply Wall St company report.

Steelcase Future Earnings Per Share Growth

Risks

• The on-going restructuring actions and lower-than-expected results in the International segment, particularly in EMEA and APAC, could continue to negatively impact revenue growth and net margins.
  
• The soft demand and competitive discounting pressures in the International market, especially in Western Europe, imply a challenging pricing environment that could lead to lower revenues and net margins.
  
• The delayed implementation and potential inefficiencies related to the ERP system rollout could lead to increased operating costs impacting net margins and earnings negatively.
  
• The dependence on a laminate supplier affected by a hurricane, leading to potential supply chain disruptions, poses a risk to revenue timing and could suppress near-term earnings.
  
• The exposure to potential tariffs, particularly affecting supplies from maquiladoras in Mexico and other international supply chains, may result in increased costs, squeezing margins and affecting overall profitability.

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 $3.4 billion, earnings will come to $140.0 million, and it would be trading on a PE ratio of 17.5x, assuming you use a discount rate of 7.4%.
• Given the current share price of $11.2, the analyst's price target of $16.5 is 32.1% 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.