Now Might Be the Time to Book Profits in Office Furniture

Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Office furniture stocks have had a great run over the past year and are trading near their 52-week highs. The market is becoming more concerned now that Herman Miller (NASDAQ: MLHR) has guided estimates lower for next quarter. The reason Herman Miller is guiding lower is that the company is seeing the effects of sequestration. The federal government is cutting back and that's not good for the office-furniture sector. If profits are forecast to be lower, it's time for investors to reassess their positions and possibly look to take profits.

Every executive's favorite chair

Herman Miller is best known for its armchairs and its modern office furniture. It is also credited with the invention of the office cubicle. Many of its furniture designs are considered icons, particularly its Aeron chair.

In the company's earnings release this week, net sales for the fourth quarter of the 2013 fiscal year rose 9.3% to $460 million. Earnings per share doubled from the prior year to $0.40 per share. For the full year, overall net sales increased 2.9% compared to the 2012 fiscal year. The company's gross margin for the quarter was 35.4%.

Going forward, the worry for investors is that the company reduced its guidance for the next quarter. The company is forecasting earnings per share of $0.36 to $0.41 per share. The consensus estimates were for earnings per share of $0.46 per share. As a result, the stock sold off over 4% in after-hours trading in response to that development. CEO Brian Walker cited the delay in customer purchases as the reason for the weakness going forward. He said:

The place we saw most of them was in the government. But I would say there were others as well. And with the government, you've got to believe some of this is probably the hangover from sequestration and all that stuff, right, with them prioritizing things.

Considering that the stock is up over 66% in the past year and has risen over 26% year-to-date, investors might want to consider locking in profits until a clearer picture emerges going forward in the next quarter.

For Herman Miller to continue growing earnings, the company needs to see growth from its recent $156 million acquisition of Maharan Fabric. The plan is to combine Maharan's textile and wall-covering business with Herman Miller's office furniture for interior design.

There's steel in this case

Steelcase (NYSE: SCS) is a manufacturer of office furniture and was originally known for its filing cabinets and safes. Now the company manufactures everything for the modern-day office.

Steelcase disappointed the market with its first-quarter earnings report. Revenue actually fell 1% on weakness in Europe. This broke the company's string of 12 consecutive quarters of growth. The bright spot for the company was the Americas segment, where revenue grew 7%. This segment accounts for 72% of the company's revenue, so it's important that this segment continues to grow.

The company expects earnings per share for the next quarter to be in the range of $0.22 to $0.26 per share. This compares to earnings of $0.23 per share in the prior year's quarter. A pick-up in demand from Europe would help the company, but with summer approaching, it's a seasonally slow period in Europe. The demand in the Americas needs to be strong for the company to beat last year's earnings per share.

Steelcase is hoping two new products will drive revenue for the company as 2013 progresses. The company unveiled a new chair that is ergonomically designed for users working on mobile devices and desktops. The chair has fans in the tech community for its design. The other product is a new wall system that lets companies carve out private, soundproof spaces. This product looks to capitalize on the office trend away from cubicles and into more collaborative work spaces.

This company makes more than just office furniture

HNI (NYSE: HNI) is the world's second-largest manufacturer of office furniture and the top manufacturer of gas- and wood-burning fireplaces. HNI sells office furniture at many different price points.

For the first quarter of this year, net sales decreased 0.7% to $442 million. Sales for the office furniture segment decreased 0.7% to 4442 million. The fireplace segment was the bright spot where sales increased 14.8% to $77 million. Gross margin for the quarter was 33.4%.

In looking forward, HNI is more optimistic than Herman Miller or Steelcase. According to CFO Kurt Tjaden on the company's most recent earning call:

For the second quarter of 2013, we anticipate overall sales to be up 5% to 8%. Office furniture sales are expected to be up 5% to 8% organically or up 4% to 7% including the impact of acquisitions and divestitures. Organic sales in both the supply-driven and contract channels are expected to be up 5% to 8%. Hearth sales are expected to be up 7% to 11%.

What I like about HNI is that the company just doesn't make office furniture. Its hearth products can benefit from the housing recovery as more fireplaces are purchased for new homes. There's potential for growth in that segment to continue.

Foolish assessment

All three companies have posted weakness or talked about weakness in their latest earnings reports. Considering that the stocks are near 52-week highs, the summer months can be seasonally slow and the effects of sequestration, it might be time to take some money off the table and move to the sidelines. Long term the companies have great businesses and any weakness in the next quarter can be seen as a buying opportunity.

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Mark Yagalla has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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