MillerKnoll: Cheap enough to offset uncertainty (NASDAQ:MLKN)

alvarez

While furniture may not seem like a very attractive category for investors, there is a market for it, and there are some fundamentally sound businesses in this space that are trading at low prices. A big example of this is MillerKnoll (NASDAQ: MLKN), which formed as a result of the merger between Herman Miller and Knoll in a deal that closed in July 2021. Given how well this company performed and given the cheap stocks right now , I think that makes it an interesting “buy” prospect in the future.

Understanding MillerKnoll

The company that is, today, MillerKnoll was once made up of two separate companies. In July last year, Herman Miller, which has a family of brands including Colebrook Bosson Saunders, Design Within Reach, Geiger, HAY and others, acquired Knoll, a company known for its extensive portfolio of furniture, textiles, leathers, accessories, and architectural and acoustic elements. The transaction cost Herman Miller shareholders $11 per share in cash plus 22% of the combined company in what ultimately had a transaction value of $1.8 billion. Since then, the combined company has focused on increasing shareholder value and, so far, the results have been impressive. But before we get to that, we should first discuss exactly what kind of company we are dealing with.

Today, MillerKnoll is quite a big player with over 60 global retail studios and over 1,000 contracted dealers it works with in 110 countries. 32% of its revenues are associated with all activities that were included in the Knoll entity. The remainder is associated with the traditional Herman Miller brand of high-end furniture and other related products dedicated largely to furnishing offices and other related properties. Although the company recently released its financial results for the last quarter of its 2022 fiscal year, the company has yet to file its annual report. So, because of this, some of the data regarding the company is from the third quarter of its fiscal year 2022.

Last quarter, 37.8% of the company’s revenue came from the labor category of the products it sells. This category includes products focused on creating highly functional and productive environments for groups and individuals. An additional 23.5% of revenue came from the performance seating category, which includes products focused on seating ergonomics, productivity and functionality for its customers. The company has also focused on the lifestyle category, which ultimately focuses on products that promote a more relaxed environment. According to management, this category accounted for 32.7% of the company’s revenue in the last quarter.

MillerKnoll Historical Financial Data

Author – SEC EDGAR Data

When it comes to a situation like the one we have here, where a company has acquired another big player, it’s not the best idea to rely on historical financial performance. To see what I mean, just compare the company’s performance in 2021 versus fiscal 2022. Revenue in 2021 was $2.47 billion. By 2022, that figure has risen to $3.95 billion. While the company has undoubtedly benefited from a reopening of the economy after the worst days of the COVID-19 pandemic, it is undeniable that the merger of the two entities has been the driving force behind this increase in sales. It also makes profitability comparisons unnecessary. And to complicate matters further, it’s worth bearing in mind that the 2021 results don’t even accurately reflect a full year of the two companies combined.

That doesn’t mean we don’t have anything to work with. One option is to look to the future. But the difficulty here is that management only provided guidance for the company’s first quarter of fiscal 2023. Overall revenue is expected to be between $1.08 billion and $1.12 billion. Midway through, that would translate to a 39% year-over-year increase. But again, acquisition is a factor in play here. On the plus side, we know organic revenue is expected to be about 11% higher than before. This demonstrates that the old company that needed Knoll continues to perform well in the current environment.

MillerKnoll Trading Multiples

Author – SEC EDGAR Data

When faced with situations like this, I like to see if the company is cheap even without considering the full impact of the transaction in question. If so, we know the picture would look even better with all the numbers incorporated. Taking the 2022 results, for example, we can see that the company’s shares are quite cheap. The company currently trades at an EV/EBITDA multiple of 7.9. Even if we look at the results before the merger, and we use the data for the 2021 financial year, we end up with a multiple of 9.9. Although management released results covering the last quarter of 2022, it did not provide details on working capital adjustments for operating cash flow. As such, we are stuck with the cash outflow of $11.9 million for fiscal year 2022. But if we assume that the relationship between EBITDA and Herman Miller’s operating cash flow will remain consistent with the combined entity, we can derive a rough approximation of $415.3 million for this measure on an adjusted basis today. This would result in a price/adjusted operating cash flow multiple of 4.8. That’s down from the 6 readings we’d get if we used the 2020 data.

As part of this analysis, I decided to compare the company to five similar companies. On a price/operating cash flow basis, these companies ranged from a low of 2.7 to a high of 17.4. In this case, only one of the five companies was cheaper than MillerKnoll. Using the EV to EBITDA approach, the range was 6.4 to 11.8. In this scenario, three out of five were cheaper than our prospect.

Company Price / Operating Cash EV / EBITDA
MillerKnoll 4.8 7.9
HNI Company (HNI) 16.7 10.1
Steelcase (SCS) 17.4 11.8
Interface (TILE) 17.1 7.3
Pitney Bowes (PBI) 2.7 7.0
ACCO Brands (ACCO) 6.5 6.4

Carry

At this time, certain difficulties and uncertainties exist for MillerKnoll investors. While this is unfortunate and muddies the waters, it is also true that the company, even ignoring several months of results from Knoll, appears to be trading low on an absolute basis and, from a cash flow perspective operating, compared to similar players. For this reason, I still think the company has good upside potential going forward. And therefore, I’ve decided to rate it as a “buy” for the time being.

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