Insiders Are Buying Office-Furniture Maker's Stock

The Grand Rapids, Mich., company, known to posture enthusiasts for its acclaimed but expensive Leap office chair, also sells desks, cubicle dividers, file cabinets and a lot more. It holds a giant 20% share of the office furniture market. The company booked sales of $3.4 billion over the past year, compared with $2.5 billion for HNI (HNI) and $2.0 billion for Herman Miller (MLHR).

Chief among reasons for caution on the stock is that its price has fallen by nearly two-thirds over the past decade. That kind of long-term erosion in a company's value generally bespeaks poor management, a prolonged industry downturn, or both. Office furniture orders generally track swings in corporate prosperity. They soared during the Internet stock bubble, plunged after the bubble popped in 2000, grew again from 2004 through 2007 and are now seen dipping slightly this year and next. The companies that have weathered that volatility best are ones that use lean manufacturing practices. Steelcase is not among them. It turns just 6.5 cents of each dollar of sales into operating profit, compared with 11.6 cents for Herman Miller.

Another sign I never like to see: more than one class of common stock. Stock investors are supposed to share in risk, reward and decision making, all according to their economic stake. Dual-class stocks often preserve inflated voting power for a privileged few. That can make companies slow to displace poor managers. Steelcase's B shares, which aren't listed on an exchange, entitle holders to 10 times as many votes as the A shares available to the rest of us.

Now for the signs to like. Those dismal operating margins are actually much improved from a few years ago. Steelcase has cut its manufacturing base by 40% and reduced its work force by half. The company's profit as a percentage of the capital it uses has doubled in two years, and might top 30% this year. Analysts say Steelcase is making its workspaces less complicated, which customers seem to like, and that the company's high-end furniture has plenty of fans among designers, insulating it somewhat from foreign competition.

The stock seems priced for meager expectations at 12 times this year's earnings forecast. Next year earnings are expected to grow 11%. The stock pays a 15-cent quarterly dividend, which works out to a yield of 2.4%. Not bad. Add another percentage point if you want to count the cash returned to shareholders through repurchases last year. (There was also a chunky $1.90 paid as a one-time dividend in December.)

The bosses are buying too. Steelcase turned up recently on a search for stock purchases made by company insiders. A trio of board members bought 66,000 shares in December. I'm rooting for them, but you might want to wait for more signs of an industry turnaround before joining them. Have a look if you like at seven other companies with recent insider buying, or run your own search using SmartMoney's stock screener.

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