Research from Water Tower Research, Water Tower Research

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.

Research from Water Tower Research

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Equity Bottom-Up

<h2>KEY POINTS</h2>
<ul>
<li>We are updating our estimates for HNI to reflect incoming data on industry shipments and deteriorating macroeconomic conditions, while re-evaluating the opportunity for margin recovery later in the year.</li>
<li>We are cutting our revenue and earnings estimates for 3Q, prompted by the June and July industry orders, as reported by the industry trade group, BIFMA. Orders turned negative (-6%) in June for the first time in 15 months, while July orders turned modestly positive.</li>
<li>Industry sales typically lag orders by four to six weeks. HNI is often a bellwether for the industry, experiencing shifts in sales and orders a few weeks ahead of competitors.</li>
<li>We have also raised our estimate for corporate overhead expense in 3Q, where our expectations for efficiencies got ahead of the reality.</li>
<li>In 4Q, we are giving the company additional credit for pricing and recovery of gross margin dollars lost to inflation in the prior-year period. We are seeing moderation in commodity inflation. To wit, the price of steel, a key commodity for office furniture makers, is flat YTD. In April, steel prices were up almost 30% YTD.</li>
<li>Net, our full-year EPS estimate is moderately lower at $2.23 versus $2.25 and more back-end loaded. Our 3Q estimate comes down from $0.82 to $0.67, while our 4Q estimate improves from $0.58 to $0.72.</li>
</ul>
<h3>ESTIMATES</h3>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/297/861/original/image_469161621663097639641.png?1663097642" class="editor-image img-responsive" data-smartkarma-image-id="297861"></figure>
<h2>COMPANY OVERVIEW</h2>
<p>Headquartered in Muscatine, IA, HNI Corporation operates in two distinct and unrelated businesses:</p>
<p>(1) HNI’s Workplace Furnishings (WF) segment manufactures and markets commercial and contract office furniture. Its office furniture includes systems, seating, storage, tables, and architectural products. Previously, WF was labeled as HNI’s&nbsp;Office Furniture Segment.</p>
<p>(2) HNI’s Residential Business Products (RBP) segment is the market leader in the manufacturing and sale of fireplaces and related hearth products. Its fireplace offering includes a broad array of gas, wood, electric, and pellet-fueled fireplaces, fireplace inserts, stoves, facings, and accessories. Previously, RBP was labeled as HNI’s&nbsp;Hearth Products Segment.</p>
<p>HNI was founded in the mid-1940s on the two ideas of treating employees fairly and serving customers with products that they value.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/297/862/original/image_42083432131663097667631.png?1663097668" class="editor-image img-responsive" data-smartkarma-image-id="297862"></figure>
<h2>INSIDE THIS NOTE</h2>
<p>Our full models are attached below.</p>
<p>Figure 1: HNI Corp. Consolidated Income Statement Model</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/297/863/original/image_88585764541663097703058.png?1663097705" class="editor-image img-responsive" data-smartkarma-image-id="297863"></figure>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/297/864/original/image_66283561351663097714803.png?1663097716" class="editor-image img-responsive" data-smartkarma-image-id="297864"></figure>
<p>Figure 2: HNI Corp. Segment Operating Income Model</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/297/865/original/image_67300401961663097734238.png?1663097736" class="editor-image img-responsive" data-smartkarma-image-id="297865"></figure>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/297/866/original/image_77618584171663097745722.png?1663097747" class="editor-image img-responsive" data-smartkarma-image-id="297866"></figure>
<p>Figure 3: HNI Corp. Balance Sheet Model</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/297/867/original/image_17747477081663097762627.png?1663097764" class="editor-image img-responsive" data-smartkarma-image-id="297867"></figure>
<p>Figure 4: HNI Corp. Cash Flow Model</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/297/868/original/image_4100249791663097781516.png?1663097783" class="editor-image img-responsive" data-smartkarma-image-id="297868"></figure>
<h3>DISCLOSURES</h3>
<div></div>
<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 and Rex Henderson, CFA who are the writers of this report, covers the Consumer sector for WTR. Mr. Bugatch and Mr. Henderson, CFA including members of their 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

We are updating our estimates for HNI to reflect incoming data on industry shipments and deteriorating macroeconomic conditions, while re-evaluating the opportunity for margin recovery later in the year.
We are cutting our revenue and earnings estimates for 3Q, prompted by the June and July industry orders, as reported by the industry trade group, BIFMA. Orders turned negative (-6%) in June for the first time in 15 months, while July orders turned modestly positive.
Industry sales typically lag orders by four to six weeks. HNI is often a bellwether for the industry, experiencing shifts in sales and orders a few weeks ahead of competitors.
We have also raised our estimate for corporate overhead expense in 3Q, where our expectations for efficiencies got ahead of the reality.
In 4Q, we are giving the company additional credit for pricing and recovery of gross margin dollars lost to inflation in the prior-year period. We are seeing moderation in commodity inflation. To wit, the price of steel, a key commodity for office furniture makers, is flat YTD. In April, steel prices were up almost 30% YTD.
Net, our full-year EPS estimate is moderately lower at $2.23 versus $2.25 and more back-end loaded. Our 3Q estimate comes down from $0.82 to $0.67, while our 4Q estimate improves from $0.58 to $0.72.

ESTIMATES

COMPANY OVERVIEW
Headquartered in Muscatine, IA, HNI Corporation operates in two distinct and unrelated businesses:
(1) HNI’s Workplace Furnishings (WF) segment manufactures and markets commercial and contract office furniture. Its office furniture includes systems, seating, storage, tables, and architectural products. Previously, WF was labeled as HNI’s&nbsp;Office Furniture Segment.
(2) HNI’s Residential Business Products (RBP) segment is the market leader in the manufacturing and sale of fireplaces and related hearth products. Its fireplace offering includes a broad array of gas, wood, electric, and pellet-fueled fireplaces, fireplace inserts, stoves, facings, and accessories. Previously, RBP was labeled as HNI’s&nbsp;Hearth Products Segment.
HNI was founded in the mid-1940s on the two ideas of treating employees fairly and serving customers with products that they value.

INSIDE THIS NOTE
Our full models are attached below.
Figure 1: HNI Corp. Consolidated Income Statement Model


Figure 2: HNI Corp. Segment Operating Income Model


Figure 3: HNI Corp. Balance Sheet Model

Figure 4: HNI Corp. Cash Flow Model

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 and Rex Henderson, CFA who are the writers of this report, covers the Consumer sector for WTR. Mr. Bugatch and Mr. Henderson, CFA including members of their 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.

Updating Our Estimates for the 3QF22 and 4QF22 To Reflect Industry and Macro Data Since July