Herman-Miller: US Office Furniture Leader at Discount to Fair Value

Danilo Santiago of Rational Investment Methodology presented his investment theses on Herman-Miller (US: MLHR) and Steelcase (US: SCS) at Wide-Moat Investing Summit 2020.

Thesis summary:

Herman-Miller and Steelcase, the two most significant manufacturers of office furniture in the US (and worldwide), recently traded below Danilo’s base-case fair-value estimate. The more undervalued of the two companies, MLHR, offers an estimated IRR of ~14% to the buy-and-hold investor. An investor achieving such a return would double her capital in less than six-and-a-half years.

Mr. Market appears to have focused on short-term EPS expectations variabilities. As it became clear that the COVID-19 crisis would bring normal life to a halt, the purchase of office furniture was put into pause. The occasional sale to a quick upgrade to home-offices was not sufficient to bring revenue expectations back from shallow levels. Manufacturers face inevitable operational deleveraging. Hence the short-term impact on EPS.

What should matter to the long-term investor are overall sales of office furniture to MLHR’s core customer groups, along with the company’s market share and ability to deliver margins not far from historical averages. Assuming no permanent modus operandi change by office workers, Herman-Miller should generate substantial cash flow to owners in the long run.

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About the instructor:

Danilo Santiago is the founder of Rational Investment Methodology (RIM), that focuses on a quasi-static group of approximately 60 publicly traded, liquid US stocks – most of these companies, defined as RIM’s Circle of Competence, have been followed for more than a decade. RIM employs extensive industry research and analysis, building highly detailed proprietary discounted-dividend models, which are used to determine “fair values” of companies based on different scenarios. Lastly, RIM constructs “rules-based” model portfolios (long-short, long-only or long- aggressive) with a company-specific margin of safety relative to “fair value”, using its proprietary Odysseus Portfolio Construction Tool. Selected model portfolios are replicated into clients’ accounts, using Interactive Brokers’ platform, adjusting the number of shares in each client’s portfolio in a pari-passu manner. Mr. Santiago is a MBA from Columbia University and has a B.S. in Electrical Engineering from the University of São Paulo.

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