Tuesday, February 16, 1999
Price (2/12/99): $20 3/4
HOW DID IT FIND TROUBLE?
Ask not for whom the bell tolls, it tolls for Knoll. For the maker of mid- to high-end office furniture, the death knell for Knoll rang industrywide. While the company delivered on the bottom line and then some, beating earnings estimates each and every quarter this past year, it could not overcome the negative sentiment toward its sector.
After peer Herman Miller (Nasdaq: MLHR) reported a winter slowdown in sales, Knoll and niche leader Steelcase (NYSE: SCS) followed suit. Investors had been expecting this for quite some time as they had begun to price down the sector securities since the summer.
Once trading as high as the $40s back in March, Knoll shares buckled under like a flawed office chair.
In 1938, German immigrant Hans Knoll started a furniture company just months after arriving in New York City. By embracing modern architecture the way his father had pioneered modern furniture back in his European homeland, Knoll sought to merge innovation with practicality. Artists and designers worked together with architects to create the company's signature pieces.
Much to Dilbert's dismay, Knoll was also the company that first introduced the partitioned planning units that evolved into today's office cubicles.
12-month sales: $948.7 million
12-month income: $93.0 million
12-month EPS: $2.14
Profit Margin: 9.8%
Market Cap: $879.8 million
Cash: $17.5 million
Current Assets: $263.4 million
Current Liabilities: $164.1 million
Long-term Debt: $159.3 million
HOW COULD YOU HAVE SEEN IT COMING?
On Wall Street, not only is the past often deemed obsolete, but sometimes even the immediate future is also overlooked. Between the aftershock of the Asian economic flu and economists feeling that the U.S. economy had peaked, the office furniture stocks began to sell-off a half-year before the fundamentals followed suit. Somehow, someday, when the economy would begin to falter, the demand for new office furnishings would diminish.
That produced the seemingly ironic event where Knoll reported record quarterly earnings in the fall and had to accompany it with a 3 million share buyback announcement.
Is it fair? Looking back it may seem most unjust to find Knoll, Steelcase, and Herman Miller all now trading at pre-teen P/E ratios. But if the recent sales slump continues to plague the sector, earnings could very well fall and the earnings multiples rise even if the shares merely treaded water.
Investors who saw the global economy teetering, and rightfully assumed that one of the ramifications would be companies holding off on furniture purchases to shore up their own financial performance, moved out of the way.
WHERE TO FROM HERE?
There is a grassy Knoll theory. There is a sound case to be made for Knoll being able to grow the greens after this hiccup. Beyond the fact that we just never know when the economy will ultimately peak, Knoll held out longer than its competitors. While Steelcase and Herman Miller began to show sales weakness in December, Knoll completed the quarter showing record earnings and beating EPS estimates, yet again, by a full four pennies a share.
While February now finds all of the players in a rut, Knoll had some favorable momentum coming into the dry spell -- gobbling up market share and introducing new product lines to keep the company as cutting edge as Hans Knoll would have wanted.
For value investors, the industry in general -- and Knoll in particular -- looks ripe for the picking. Last month analyst Oscar Schafer shared a zeal for the sector in Barron's Roundtable '99. While he may have been a few weeks early, with all three players collapsing even further with respective earning warnings, there is definitely value here amongst the unloved. Just ask Knoll, which recently increased its share buyback program to cash in on the bargain.
-Rick Aristotle Munarriz
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