The company has a patchy earnings track record with five years of losses in the last decade, although it has achieved three consecutive years of profitability from 2009 to 2011. Its cash flow track record is more comforting, with positive operating cash flow in each of the last eight years starting from 2004. Free cash flow was positive in four out of the past five years, despite modernization and restructuring efforts over the past several years. TILE’s historical investments in global manufacturing capabilities and mass customization techniques and facilities, coupled with rationalization and repositioning initiatives in the last decade have paid off and enabled it to increase production levels at its existing capacity without significant capital expenditures. Its existing capacity allows it to increase production levels without significant capital expenditures, further enhancing its free cash flow generation capability as demand for its products rises
Interface is highly geared with a gross debt-to-equity ratio of 100% and a net gearing of 67%. Prior to 2006, The company’s gross debt-to-equity ratio was consistently above 200%. They re-initiated dividends in 2007 after a four year break and currently sport a dividend yield of 0.54%.
Investment Risks
Sales of the company’s principal products have been and may continue to be affected by weal economic conditions and the renovation and construction of commercial and institutional buildings. It has historically generated most of its sales in the corporate office segment, although it is making efforts to diversify its end markets and reduce its dependence on the corporate office market segment. TILE targets to eventually reduce the proportion of company sales attributed to the corporate office market segment to 30%.
Interface relies significantly on its principal design consultant, David Oakey Designs. David Oakey Designs provides carpet design and consulting services to TILE’s floorcovering businesses under an exclusive consulting contract that contains non-competition covenants. Its current agreement with David Oakey Designs extends to April 2013 and David Oakey Designs cannot provide similar services to any other carpet company while the agreement is still in effect. The company introduced more than 25 new carpet designs in 2011, and David Oakey Designs had a pivotal role in developing its i2product line, which features mergeable dye lots and carpet tile products designed to be installed randomly without reference to the orientation of neighboring tiles.
Conclusion
Interface is moving into growth stock territory with its current valuations. Despite its market leading position and strong growth opportunities, its low dividend yield and high gearing are stumbling blocks for value investors.
The article Interface Should Be Swept Under The Carpet for Now on Valuation Grounds originally appeared on Fool.com and is written by Mark Lin.
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