I've accomplished some due diligence on the company and have a few observations to make.
Steelcase is the world's largest manufacturer and provider of office furniture. The US industry is $10B a year and grows usually between 7% and 15% per year. Steelcase claims a 20% market share and has been growing slightly ahead of the industry average (e.g., 8.3% in fiscal 1997 and 16.5% for the first nine months of fiscal 1998). Steelcase's US market share is twice that of its nearest competitor. Their SEC filings highlight lots of expensive new products and many awards.
The pending IPO will offer 12,150,000 Class A shares to the public priced at a maximum of $26.00 per share; 9.72M will be offered in the US and 2.43M on international markets. The shares are being offered by existing private shareholders, thus proceeds will go to shareholders, not to the company.
Current financials look OK: cash, $366M; assets, $1,985M; liabilities, $687M (2.9:1 ratio); shareholder equity, $1,298M (these figures have included the conversions necessary to accommodate the IPO).
Following the IPO there will be a weighted average of 158.3M shares outstanding: 12.15M offered, a few for options, etc., and 144M Class B shares remaining in the hands of the "inner circle", i.e., those offering a few of their shares to the public. Each class B share will have 10 votes, and each Class A, one. Thus, Class B shareholders will control 99.2% of the votes. Furthermore, each Class B share is convertible to a Class A at any time for any reason, thus there is the potential for dramatic increase in the public float if a private shareholder owning lots of stock needs cash. However, for 180 days from 20 January 1998 (the date of the SEC filing), there is a lock-out in effect. In other words, no Class B shareholder can dump shares without written permission from the lead underwriter.
Thankfully, shares and options granted to special employees will not dilute the public float -- they have been purchased from Class B shareholders for that purpose.
1997 sales were $2.4B with $65M reinvested in R&D (only 2.7% but, hey, this isn't Silicon Valley). Using figures for the first nine months of fiscal 1998 (fiscal year ends on 28 FEB), Steelcase is on target for annualized FY98 sales of $2.75B (15% growth from previous year). Annualized earnings look to be $215M or $1.36 per share; this gives a P/E ratio at the maximum offering price of $26.00 a share of 19.1. Compare this to their average 3-year sales growth of 9.9%, and the shares look pricey. Three-year growth breaks down into 9.1% per year in the US versus 19.5% internationally. However, as noted above, recent growth has been strong. In addition, gross margins increased from 29.1% in FY95 to 35.6% in FY97; for the first 9 months of FY98, they rose slightly to 36.1%. The company achieved this via a cost-reduction program and higher-margin products.
Steelcase has paid a regular dividend over the years. It is currently $0.28 per share for a yield of 1.08% per $26.00 share. Major risks are strong competition, slips on achieving goals, a negative economic climate, and the fact that 9.3% of revenues are generated outside the US.
In my view, the IPO is fairly priced considering the company's financials and prospects for growth via new products and acquisitions. The large overhang in Class B shares after 180 days is worrisome -- smart purchasers might be long gone by then. Also troublesome, in my view, is the prospect of a global recession occasioned by the Year 2000 computer problem. Steelcase sells high quality merchandise to corporations which, by late 1998, might be reallocating information-systems and corporate-upgrade budgets to the non-productive sink of computer code remediation. In other words, companies might have little to spend on expensive office furniture.
I'm going to buy it if I can get shares at the offer and probably hang on for several months. |
