Has Herman Miller Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Herman Miller (Nasdaq: MLHR  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Herman Miller.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% (2.1%) Fail
  1-Year Revenue Growth > 12% 4.5% Fail
Margins Gross Margin > 35% 34.3% Fail
  Net Margin > 15% 4.4% Fail
Balance Sheet Debt to Equity < 50% 100.7% Fail
  Current Ratio > 1.3 1.81 Pass
Opportunities Return on Equity > 15% 33.2% Pass
Valuation Normalized P/E < 20 14.60 Pass
Dividends Current Yield > 2% 0.5% Fail
  5-Year Dividend Growth > 10% (23.1%) Fail
       
  Total Score   3 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Herman Miller last year, the company hasn't been able to improve on its three-point score. Shareholders aren't happy with the stock's 30% decline in the past year, either.

Herman Miller is the company behind the ergonomically sophisticated Aeron chair. With a wide array of products for office applications, including desks, modular systems, storage products, and other furniture, Herman Miller does well when businesses are earning enough profits that they can afford to buy its goods.

Unfortunately, businesses don't seem any better off than consumers when it comes to high-priced furniture items. We've recently seen that phenomenon play out in the mattress space, where Tempur-Pedic (NYSE: TPX  ) , Select Comfort (Nasdaq: SCSS  ) , and Mattress Firm (Nasdaq: MFRM  ) have all seen their shares plunge in response to slowing sales and profit growth that left their stock valuations looking inflated. Similarly, recliner specialist La-Z-Boy (NYSE: LZB  ) hasn't been able to keep its sales up either, and investors have lost patience with its poor performance.

For Herman Miller to improve, it really needs to see small businesses step up to the plate and increase their purchases. Until a much more robust economic recovery takes hold and encourages entrepreneurs to get back into the risk-taking business, Herman Miller and other companies that cater to the needs of business customers will continue to struggle.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Herman Miller isn't the perfect stock, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Click here to add Herman Miller to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Tempur-Pedic. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 07, 2012, at 12:33 AM, diverdown19 wrote:

    shares plunge in response to slowing sales and profit growth your full of SH!! I don t see slowing sales at Select Comfort if You have hidden Numbers let us know

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