An All-Purpose Stock Idea

When I covered Corporate Responsibility Officer's most recent list of "The 100 Best Corporate Citizens," I highlighted that such lists can be great starting points in identifying solid investments in well-run companies with socially responsible attributes, but it still takes a lot more work to find the ones that are poised for the most growth for investors.

The types of companies that made the list include many of the well-known names people would expect to see: Green Mountain Coffee Roasters, Timberland (NYSE:TBL), and Starbucks (NASDAQ:SBUX) all come to mind. But what about a company that many investors would probably overlook?

Here's one that could be a potential winner with the best of all worlds.

Boring industry, great opportunity
I stumbled upon Steelcase (NYSE:SCS) on the list, and with a name like that, who could resist digging a little deeper? I discovered it's part of the office furniture industry, which always sounded boring to me (and of course, sometimes the industries that sound like the biggest yawners might yield unexpected growth and value).

Steelcase, which has been around since 1912, debuted on "The 100 Best Corporate Citizens" list at No. 17 primarily because of its attention to environmental design. One of Steelcase's lines of office chairs, Think, consists of 44% recycled materials, and even better, Think chairs are 98% recyclable and easily disassembled for recycling once their useful life is over. Steelcase also got points for charitable giving and support for education.

Adding environmentally sustainable design to its overall product portfolio could give Steelcase additional growth and competitive advantage as more companies try to make their offices "greener," but Steelcase has other things going for it, too. It's been overhauling its business in order to implement lean manufacturing practices and improve margins. As far as its market goes, it now wishes to address more than just large corporations, but also small businesses and the health-care market. It aims to implement designs based on how people really work, and establish the kind of emotional connections with customers that many modern companies have figured out work wonders for product sales.

Of course there's plenty of competition, not least of which comes from rivals Herman Miller (NASDAQ:MLHR), HNI Corp. (NYSE:HNI), Kimball (NASDAQ:KBALB), and Knoll (NYSE:KNL). Herman Miller and Knoll also make their own answers to the aforementioned environmentally aware chair. However, with $2.9 billion in annual sales, Steelcase has a leadership role in the segment.

There's also the nature of its business. The industry is cyclical, and office furniture manufacturers can have an extremely difficult time when the economy slows down. Recessions are very bad for such companies, but then again, when corporations start adding jobs again, there's always a need for new furniture. For the long term, it stands to reason that such a company has staying power, especially if it's evolving with the times like Steelcase appears to be doing.

Steelcase's steel-clad valuation
At first blush, Steelcase's P/E ratio of 27.5 may sound rich for what may seem like a low-growth industry. However, if you consider analysts' expectations for 30% earnings growth from Steelcase over the next five years, things start to sound a little bit more compelling. Even more interesting, over the last 12 months, Steelcase has doubled its free cash flow to $222.1 million. I decided to see what a discounted cash flow calculation would reveal.

Despite analysts' expectation of 30% growth over the next five years, I decided to take a much more cautious approach with my inputs, since earnings growth doesn't necessarily translate into anything near that kind of growth in free cash flow. After all, if the economy slows down, that could spell trouble for this company. Over the last five years, Steelcase had a compounded annual growth rate in free cash flow of 49%. (Bear in mind that in the fiscal year ended 2003, Steelcase was affected by the last recession and economic slowdown, resulting in free cash flow of negative $27.8 million. That was a tough time for many companies, including Steelcase -- however, in another plus, Steelcase has said its changes to its business model should make it better-prepared than last time, should another downturn arrive.)

I've outlined three possible scenarios in the following chart. 

As you can see, though, if Steelcase can't keep up its currently high rates of free cash flow growth and stays within the conservative range in Scenario 1, it's fairly valued now. I also believe Scenario 3 sounds way too aggressive for my blood, since companies like Steelcase bear the risk of hard times during economic downturns and recessions (and we all know it's not a matter of if we have a recession or downturn, but when).

You've probably already guessed I prefer Scenario 2, because it doesn't get too optimistic given the risks, while taking into account that Steelcase has been expanding its margins and business opportunities as well as focusing on forward-thinking furniture innovations. I wouldn't think those levels of growth would be out of line, suggesting that the stock is currently undervalued.

It sounds to me like Steelcase may be a great idea for investors looking for growth and value (not to mention the added bonus of a dividend yield of 2.7%). Steelcase even has some superior corporate citizenship clout to sweeten the deal. For long-term investors who are looking for a little bit of everything, Steelcase is worth some thought.     

Starbucks is a Motley Fool Stock Advisor recommendation. To find out which other companies David and Tom Gardner have recommended to investors, click here for a 30-day free trial.

Alyce Lomax owns shares of Starbucks. The Fool has a steel-clad disclosure policy.