Any time you stumble upon a company with a P/E over 100, you know you're in for an analysis treat; it's likely that very small profits that are distorting the ratio. This is indeed the case with office furniture designer and manufacturer Steelcase (NYSE: SCS ) , which sports a P/E ratio of over 150, but is in the midst of a multiyear turnaround.
For the last year or so, Steelcase has flashed financial signals that its turnaround was for real, and its first-quarter performance helps cement that perception. The company turned in a $0.05 profit versus last year's first-quarter loss of $0.04.
Steelcase's primary competitors in the U.S. are Herman Miller (Nasdaq: MLHR ) and HNI (NYSE: HNI ) , but the company's continued global expansion will have it bumping up against additional competitors such as Japan's Kokuyo.
Competition aside, the company's restructuring has left it in a position of strength as it enters new markets with a broader array of products, but lower development costs due to a rationalization of development and manufacturing costs. Some of this can be seen in the company's expanding gross margins, which hit 29.5% this quarter versus last year's 27.9%. Steelcase's eventual target gross margin is 35%.
It's also important to note that after all of its restructuring, Steelcase still has a strong balance sheet. The company does carry a fair amount of debt -- though it paid down a large chunk this quarter -- but it also has the cash on the balance sheet and free cash flow to make payments as needed. The company also pays a nice little dividend that yields near 2%.
Investors interested in digging further into Steelcase will want to pay close attention to the company's ownership structure. Currently, Fifth Third Bancorp (Nasdaq: FITB ) is the majority holder of Steelcase's Class B shares, which have super-voting rights -- 10 votes for the B shares versus one for the A shares. After a quick glance, I don't see this as a negative, because Fifth Third also owns a fair amount of the Class A shares, and I believe the bank's ownership stake is merely an investment it wants to see perform well, not one whose control may lead to problems for minority shareholders.
That said, I'd pay close attention to Fifth Third's actions -- it's the player with the most clout.
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Nathan
Parmelee has spent a good deal of time planted in Kokuyo chairs and found them pretty comfy. He has no financial interest in any of the companies mentioned. You can view his profile here. The Motley Fool has an iron-clad disclosure policy.
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