Work-From-Home Effect: Steelcase Stock Won’t See Full Recovery

Despite more than a 35% rise from its March lows of this year, at the current price of $10 per share, we believe Steelcase Inc stock (NYSE: SCS) is undervalued. Steelcase is a US-based furniture company producing office furniture, architectural and technology products for office environments and to some extent in the education, health care, and retail industries. SCS stock has increased from $7 to $10 off its recent bottom compared to the S&P 500 which increased almost 50% from its recent lows. The stock has underperformed the market and is still 50% below its December 2019 level. With the gradual lifting of lockdowns the supply constraints are likely to ease, leading to modest improvement in sales, which could take the stock up by about 20%. However, it is unlikely to go back to its pre-Covid level due to an increase in the work-from-home culture which is leading to expectations of lower demand for office furniture. . Our dashboard What Factors Drove -29% Change In Steelcase Stock Between 2017 And Now? provides the key numbers behind our thinking.

The 43% rise in SCS stock price between Dec 2017 to Dec 2019 is justified by significant growth in earnings during those two years. Revenue increased 22% from $3.1 billion in FY2018 to $3.7 billion in FY2020 (SCS’ fiscal year ends in February every year – eg: FY2018 denotes 12-month period ending February 2018). This effect was amplified by margins more than doubling from 2.6% to 5.4% during this period. On a per share basis, earnings went up from $0.68 to $1.67. Higher revenue and margins were driven by overall industry growth, acquisitions, change in list pricing, lower commodity costs and benefits from gross margin improvement initiatives.

During the same period, the P/E multiple declined from 21x to 12x. This was because the rise in stock price was lower than the growth in EPS. The P/E crashed in 2020 following the outbreak of coronavirus pandemic but has recovered partially since its March lows. Currently the multiple stands at 6x and is likely to see a modest upside as the current crisis abates.

Where Is The Stock Headed?

The global spread of coronavirus led to lockdown in various cities across the globe, which affected industrial and economic activity. With the majority of people working from home, the demand for office furniture has decreased. This was evident to a certain extent from the recently released Q2 2021 results of SCS for the quarter ending August 2020. Revenue declined by 18% while earnings dropped 6% on y-o-y basis. This did not reflect the complete impact of the crisis as the company benefited from a good order backlog.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. With the outbreak of the pandemic and huge surge in the number of people working from home, investors have been pretty downcast about anything related to physical office spaces. Though the lockdowns are gradually being lifted, there’s no clear timeline for when or if office life will get back to a pre-pandemic level. The only major advantage lifting of lockdowns will have on the company in the short term is the easing of supply impediments. Thus, uncertainty about growth in future office spaces and expectations of more adoption of technology and virtual offices is unlikely to lead to SCS stock rising back to its pre-Covid level anytime soon. A good order book, elevated levels of revenue and earnings, and with investors’ focus having shifted to 2021 numbers (for year ending Feb 2022 in the case of SCS), Steelcase Inc’s stock is likely to see a growth of about 20% from its current level, but will remain much lower than its pre-Covid high.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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