Research from Water Tower Research, Water Tower Research

Water Tower Research

Research from Water Tower Research

Water Tower Research is a leading equity research firm that provides research on micro, small and mid cap companies.

Water Tower Research was founded by Wall Street veterans after witnessing a fundamental shift in the investment research industry with the result being a declining knowledge base among investors, a lack of awareness and a shrinking pool of fundamental research being conducted on companies across the small-cap and micro-cap spectrum. The same issues are now increasingly occurring in the mid-cap space. This sea change within the investment community is impacting not only the companies themselves but also current shareholders and potential investors. With significantly less active sell-side sponsorship by Wall Street, a substantial information gap has developed between companies and various constituents in the financial community. The net result is fewer channels for insight and information to flow between companies and investors.

Equity Research Firm

Equity Bottom-Up

<h2>KEY POINTS</h2>
<ul>
<li>On March 23, 2022, Steelcase reported results for its 4Q22, ended February. In the release, management also provided its outlook for 1Q23 and the year.</li>
<li>Consolidated 4Q22 sales were $753.1 million, up 11.2% versus $677.1 million reported for 4Q21 and up 11.6% organically, excluding the effects of currency translation and acquisitions. 4Q22 sales missed our estimate modestly by $3.7 million but were within the $740 to $765 million guidance range. The beat versus last year accounted for an improvement in y/y EPS of $0.02, and the miss versus our estimate had little impact on EPS versus our estimate.</li>
<li>Incoming order growth remained strong, up 27% organically in 4Q22 with growth across the three reporting segments. Order growth was strongest in the Americas segment, and CEO Armbruster noted that its growth rate had outpaced that reported by BIFMA in each of the last five months.</li>
<li>Backlog remained elevated, ending at $787 million, down modestly from the end of 3Q22 but 77% higher than the backlog at the start of fiscal 2022.</li>
<li>4Q22 EPS was ($0.02) versus 4Q21 diluted EPS of $0.06, thereby beating/missing our $0.01 estimate. Management guidance, issued with it 3Q22 report was for 4Q22 EPS to be “approximately breakeven.”</li>
<li>Operating income was $2.1 million, down $4.6 million y/y and missing our $7.1 million estimate by $5.0 million. Gross margin was the culprit as the cost/pricing gap continues as do inefficiencies and supply chain disruptions persist, notably in freight and labor.</li>
<li>For 1Q23, management guided sales to a range of $680 to $705 million (vs $556 million in 1Q22). Management noted the backlog continues to have a historical high percentage of orders with ship dates more than one quarter away. Given continued cost/price gap management guided 1Q23 to a loss of $0.15 to $0.20 per share.</li>
<li>Management guided 2023 to rebound with targeted organic revenue growth of 15% to 20% ($3.175 billion to $3.30 billion) and full year diluted EPS of $0.50 to $0.70. The continued momentum of orders, the return to work for many offices, the impact of four list price increases delivering price/cost benefits, and some abating of disruptions bolster management’s argument for a 2023 turnaround.</li>
<li>Our variance analyses compare key metrics of the 4Q22 report to 4Q21 and our estimates. Also, we provide a segment variance analysis and an analysis of organic growth for 4Q22 and for all of fiscal 2022.</li>
<li>Management will host its earnings conference call on Thursday morning at 8:30 am EDT. This note provides our initial analysis of earnings and outlook versus last year and versus our estimates. Our refreshed earnings estimates will be provided in a separate note after management’s call.</li>
</ul>
<h2>COMPANY OVERVIEW</h2>
<p>Steelcase is one of America’s great companies. Named 15 times by&nbsp;Fortune Magazine&nbsp;as one of the world’s most admired companies, Steelcase is a global market share leader for commercial/contract furniture. Its global capabilities and research-based approach make it a preferred partner for organizations in any part of the world.</p>
<p>Steelcase defines its purpose as “Unlocking human promise by transforming work, worker and workplace.” In this way, the company affirms its mission to the workplace. Today, the company’s family of brands include Steelcase®, Coalesse®, Designtex®, Smith System®, AMQ®, Turnstone®, and Orangebox®.</p>
<p>The Steelcase growth strategy is to translate research-based insights into products, applications, and experiences. Today, Steelcase goes to market through ~800 independent and company-owned dealer locations (~400 in its Americas segment, ~340 in its EMEA segment, and ~60 in its Other segment). The company has 65 locations in 17 countries; of which 15 are dedicated to manufacturing (7 in the Americas, 5 in EMEA, and 3 in the Other segment).</p>
<h2>VARIANCE ANALYSIS</h2>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/265/112/original/image_5429662231648168380798.png?1648168383" class="editor-image img-responsive" data-smartkarma-image-id="265112"></figure>
<p>Source: Company Filings, Water Tower Research</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/265/113/original/image_75134542941648168406081.png?1648168408" class="editor-image img-responsive" data-smartkarma-image-id="265113"></figure>
<p>Source: Company Filings, Water Tower Research</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/265/114/original/image_6374375951648168432500.png?1648168434" class="editor-image img-responsive" data-smartkarma-image-id="265114"></figure>
<p>Source: Company Filings; Water Tower Research</p>
<h2>DISCLOSURES</h2>
<p>Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.<br><br>WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.<br><br>Budd Bugatch, who is the writer of this report, covers the Consumer sector for WTR. Mr. Bugatch and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.<br><br>Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.<br><br>WTR is being compensated for its research by the company which is the subject of this report. WTR receives no more than a maximum of $10,500 per month from a given client and is required to have at least a 6-month commitment. None of the earned fees are contingent on, and WTR’s client agreements are not cancellable for the content of its reports. WTR does not accept any compensation in the form of warrants or stock options or other equity instruments that could increase in value based on positive coverage in its reports.<br><br>WTR or an affiliate may seek to receive compensation for non-research services to covered companies, such as charges for presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services that WTR or an affiliate might offer to clients.<br><br>The manner of WTR’s research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly-written compliance guidelines.<br><br>The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors, agents or affiliate shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.<br><br>All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.</p>

KEY POINTS

On March 23, 2022, Steelcase reported results for its 4Q22, ended February. In the release, management also provided its outlook for 1Q23 and the year.
Consolidated 4Q22 sales were $753.1 million, up 11.2% versus $677.1 million reported for 4Q21 and up 11.6% organically, excluding the effects of currency translation and acquisitions. 4Q22 sales missed our estimate modestly by $3.7 million but were within the $740 to $765 million guidance range. The beat versus last year accounted for an improvement in y/y EPS of $0.02, and the miss versus our estimate had little impact on EPS versus our estimate.
Incoming order growth remained strong, up 27% organically in 4Q22 with growth across the three reporting segments. Order growth was strongest in the Americas segment, and CEO Armbruster noted that its growth rate had outpaced that reported by BIFMA in each of the last five months.
Backlog remained elevated, ending at $787 million, down modestly from the end of 3Q22 but 77% higher than the backlog at the start of fiscal 2022.
4Q22 EPS was ($0.02) versus 4Q21 diluted EPS of $0.06, thereby beating/missing our $0.01 estimate. Management guidance, issued with it 3Q22 report was for 4Q22 EPS to be “approximately breakeven.”
Operating income was $2.1 million, down $4.6 million y/y and missing our $7.1 million estimate by $5.0 million. Gross margin was the culprit as the cost/pricing gap continues as do inefficiencies and supply chain disruptions persist, notably in freight and labor.
For 1Q23, management guided sales to a range of $680 to $705 million (vs $556 million in 1Q22). Management noted the backlog continues to have a historical high percentage of orders with ship dates more than one quarter away. Given continued cost/price gap management guided 1Q23 to a loss of $0.15 to $0.20 per share.
Management guided 2023 to rebound with targeted organic revenue growth of 15% to 20% ($3.175 billion to $3.30 billion) and full year diluted EPS of $0.50 to $0.70. The continued momentum of orders, the return to work for many offices, the impact of four list price increases delivering price/cost benefits, and some abating of disruptions bolster management’s argument for a 2023 turnaround.
Our variance analyses compare key metrics of the 4Q22 report to 4Q21 and our estimates. Also, we provide a segment variance analysis and an analysis of organic growth for 4Q22 and for all of fiscal 2022.
Management will host its earnings conference call on Thursday morning at 8:30 am EDT. This note provides our initial analysis of earnings and outlook versus last year and versus our estimates. Our refreshed earnings estimates will be provided in a separate note after management’s call.

COMPANY OVERVIEW
Steelcase is one of America’s great companies. Named 15 times by&nbsp;Fortune Magazine&nbsp;as one of the world’s most admired companies, Steelcase is a global market share leader for commercial/contract furniture. Its global capabilities and research-based approach make it a preferred partner for organizations in any part of the world.
Steelcase defines its purpose as “Unlocking human promise by transforming work, worker and workplace.” In this way, the company affirms its mission to the workplace. Today, the company’s family of brands include Steelcase®, Coalesse®, Designtex®, Smith System®, AMQ®, Turnstone®, and Orangebox®.
The Steelcase growth strategy is to translate research-based insights into products, applications, and experiences. Today, Steelcase goes to market through ~800 independent and company-owned dealer locations (~400 in its Americas segment, ~340 in its EMEA segment, and ~60 in its Other segment). The company has 65 locations in 17 countries; of which 15 are dedicated to manufacturing (7 in the Americas, 5 in EMEA, and 3 in the Other segment).
VARIANCE ANALYSIS

Source: Company Filings, Water Tower Research

Source: Company Filings, Water Tower Research

Source: Company Filings; Water Tower Research
DISCLOSURES
Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.  WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.  Budd Bugatch, who is the writer of this report, covers the Consumer sector for WTR. Mr. Bugatch and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.  Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.  WTR is being compensated for its research by the company which is the subject of this report. WTR receives no more than a maximum of $10,500 per month from a given client and is required to have at least a 6-month commitment. None of the earned fees are contingent on, and WTR’s client agreements are not cancellable for the content of its reports. WTR does not accept any compensation in the form of warrants or stock options or other equity instruments that could increase in value based on positive coverage in its reports.  WTR or an affiliate may seek to receive compensation for non-research services to covered companies, such as charges for presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services that WTR or an affiliate might offer to clients.  The manner of WTR’s research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly-written compliance guidelines.  The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors, agents or affiliate shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.  All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.

4Q22 Sales and Earnings Miss Modestly; 1Q23 Loss Guided; Numerous Reasons for Optimism

Analyst

Alasdair Moody

Exposing Creative Accounting

Bucephalus Research Partnership

Bucephalus Research Partnership Limited. Exposing Creative Accounting.

At the Bucephalus Research Partnership (BRP) we analyse financial statements using our accountant's practical experience and our own quantitative algorithms for corporate governance, accounting risk and peer performance.

Our thematic research refines our unique algorithms while our single stock research focuses on examples where we discover a significant gap between published accounts and business reality.

​Bucephalus Research Partnership:
- Is an independent fee-based research service
- Does not take proprietary positions, long or short
- Does not solicit business or fees from the corporates we review

Forensic Accounting

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Man Wah came to our attention in both July’s thematic report on debt manipulation and our up coming tax report.  When we realised that Man Wah has a very unusual approach to its treasury operations and some almost miraculous performance statistics, we felt it was time for a closer look.Man Wah has been surprisingly profitable for several years but, in FY 2017, it outdid itself, reporting Chinese wholesale gross profit margins that appear to be over 60%. This, combined with a 34% increase in…

Man Wah Holdings (1999 HK): Looking Over-Stuffed

United States

Steelcase Inc. designs and manufactures products used to create high performance work environments.  The Company's products include office furniture, furniture systems, interior architectural products, technology products, seating, and related products and services.  Steelcase has operations in various countries.

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Steelcase Inc Cl A (SCS US)

4Q22 Sales and Earnings Miss Modestly; 1Q23 Loss Guided; Numerous Reasons for Optimism

KEY POINTS On March 23, 2022, Steelcase reported results for its 4Q22, ended February. In the release, management also provided its outlook for...

Water Tower Research

Man Wah Holdings (1999 HK): Looking Over-Stuffed

Man Wah came to our attention in both July’s thematic report on debt manipulation and our up coming tax report. When we realised that Man Wah has...

Bucephalus Research Partnership

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