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Tuesday, April 1, 2014 - 14:30
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Tuesday, April 1, 2014 - 14:30

Forget The Sequester -- Get 33% Upside Instead

Tuesday, April 1, 2014 - 2:30pm

With the worst of the U.S. government's budget "sequester" behind us, there will be some big winners as government spending rebounds. One little-noticed area pinched during the crisis was the government's spending on office furniture.

When the government budget was in the spotlight, certain expenses, such as new office furniture, were put on the back burner. However, government employees still need a place to work, and the U.S. government has historically been a big customer of the major office furniture companies.

One company that's already seeing the benefits of a loosening of the government's purse strings is Herman Miller (Nasdaq: MLHR). Shares of Herman Miller made a new 52-week high after releasing third-quarter earnings last month.

The company's strong order book appears to have investors excited, and rightfully so. The best news is that the company saw order growth from the U.S. government for the first time in 10 quarters.

To boost its specialty and consumer segment, Herman Miller purchased textile maker Maharam last year. This boosted sales of the consumer segment 35.5% in the third quarter. New orders for the segment more than doubled to $71.5 million.

The Maharam acquisition is key for Herman Miller. It positions the company to capture the high-margin and high-growth area of interior textiles and designer wall coverings. What I like most about this acquisition is that it not only helps Herman Miller win design contracts and office furniture sales, it also puts the company in position to serve the residential market.

YouTube/Herman Miller
Herman Miller is known for being more high-end and of much greater quality. This is why you find Herman Miller products in most premier offices and in increasingly more homes.

The Maharam acquisition goes a long way in boosting the Herman Miller Collection, which now consists of furniture for living and dining rooms, meeting rooms and home offices, and outdoor areas. The company is also making cabinets and side pieces for each room.

With the Maharam acquisition and the Herman Miller Collection, the company is targeting the high-end market for homes and offices that have much larger budgets. This is how Herman Miller is distinguishing itself from the competition. Herman Miller is known for being more high-end and of much greater quality. This is why you find Herman Miller products in most premier offices and in increasingly more homes.

International sales rose 7.8% in fiscal third quarter to $97.9 million. New orders rose 24.8% year over year to $100.8 million.

One region with plenty of turnaround potential is the Asia-Pacific region, China in particular. Herman Miller has seen a slowdown in China due to a slowdown in new office buildings being built. In the third quarter, Herman Miller saw slight order growth compared with the prior quarter. That is a positive sign, considering the China market has been weak for quite some time.

Herman Miller's margins continue to improve. During the third quarter, its gross margin rose to 35.7% from 34.1% the previous year. The company credits this margin improvement to favorable product and channel mix, and improved labor productivity and cost savings.

Margins look set to continue improving, especially as the Maharam acquisition becomes fully integrated and the company benefits from last year's restructuring of its sales and distribution channels.

Herman Miller also enacted a 2.5% price increase in February on its general list prices. A company that is raising its prices is certainly a sign that its business is strong.

Risks to Consider: A slowdown in the global recovery or renewed government gridlock could crimp sales. Further, Herman Miller faces stiff competition from the likes of Steelcase (NYSE: SCS) and HNI (NYSE: HNI). More competitive pricing on their part could hurt Herman Miller's sales and margins.

Action to Take --> Buy Herman Miller with a price target of $42 for upside of 33%. This would put the company trading in line with its historical price-to-earnings (P/E) multiple of 20, up from a current 15 times next year's earnings.

P.S. Herman Miller is looking overseas for growth -- but it's also a great place to look for income. Nearly 80% of the world's highest-yielding stocks are outside the U.S. -- investors need only to know where to look. In this special report, we tell you everything you need to know about safely and easily owning international high-yielders, including names and ticker symbols of some of the best high-yielders in the world. Click here to learn more.

Marshall Hargrave does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

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