Steelcase Poised to Extend Earnings Winning Streak but Stock Looks Undervalued

NEW YORK (TheStreet) -- Steelcase (SCS), one of the world's largest manufacturers of office furniture will report first-quarter fiscal 2016 earnings results Wednesday after the closing bell. 

Combined with its diligent cost controls and margins expansion, there may not be a better time to buy shares of an undervalued company with strong growth potential.

The Grand Rapids, Mich.-based company's stock offers a compelling entry point at current levels, especially since shares are down 6% since March. With full-year earnings projected to climb 17%, which is 10 percentage points slower than its five-year annual growth rate of 27%, this suggests meaningful earnings growth acceleration in the years ahead. Based on fiscal 2017 consensus earnings estimate of $1.35 a share, Steelcase is projected to grow next year's earnings at a rate of 30%.

There aren't many S&P 500 companies that are growing earnings at a rate of 30%.

Combined with its 11-cent a share quarterly dividend, yielding 2.4% annually, Steelcase stock, which has a consensus buy rating, offers excellent value. The company generated $3 billion in sales in 2014.

The stock has already foreshadowed some of its potential strength. Steelcase stock is up 6% so far in 2015 and has gained 9% just in the past 30 days.

Steelcase has grown internationally by designing and selling various types of office furniture such as chairs, tables and ergonomic work tools. The company also manufactures ceramic steel surfaces like office whiteboards and chalkboards, selling to schools, businesses and government agencies.

Steelcase strives to be a one-stop shop for all office/business-related furniture needs.

To be sure, the shares may not appear cheap today at 27 times earnings, against a P/E of 21 for the S&P 500 index. But the company has executed skillfully on its strategy, beating Wall Street's earnings estimates in three consecutive quarters.

Steelcase has been working to lower costs and expand its margins by scaling back on its European operations -- particularly in areas that have delivered the lowest profit margins. At the same time, the company has been increasing manufacturing capacity and re-allocating resources to regions where it is more likely to achieve stronger growth.

To that end, Steelcase is likely to create tons of value in the quarters and years ahead without feeling the impact of the strong U.S. dollar that devalues sales in overseas markets. 

For the ended May, the average analyst earnings estimate calls for 15 cents a share on revenue of $704 million, translating to a year-over-year increase of 25% and a 2.6% decline year over year, respectively. For the full year, ending February, earnings are projected to climb 17% year over year, while revenue is expected to be $3.10 billion, up 1.2% from last year.

Investors who buy Steelcase stock today can own a company that is projected to accelerate earnings growth by 13 percentage points in one year. Plus, Steelcase stock only cost 13 times forward earnings, which is four points below the forward price to earnings ratio of the S&P 500. 

Because of its financial discipline and growth, a case can even be made that Steelcase's P/E ration should be higher. It wouldn't be surprising if Steelcase beats earnings estimates again. 

This article is commentary by an independent contributor. At the time of publication, the author held no shares in any of the stocks mentioned.

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