TILE Interface, Inc.

Sector financial performance:

This company, that is primarily a carpet tile manufacturer focusing on corporate office market, has been grouped into floor covering sector in furnishing industry.

It seems that demand in US market for soft surface flooring covering products has been weak in the past several years as indicated by decreasing sale volume of companies that have a focus on this type of products. Demand for hard surface products seem to be strong and has been the major driver of companies’ sales growth but the growth has been seen slowing. We thus have seen a significant decrease since 2016 in sales among soft surface product-focused companies and a bounce back in 2017 as they shift their products to hard surface products. The typical annual growth in sales is about 4%, 3.6%, -1.2% and 6% in2018, 2017, 2016 and 2015.

Companies’ gross margin seem improved in the past several years ( 31% in 2018) as cost of raw materials continued to decrease and price raised. The average SG&A as percentage of sales is about 22% and the operating margin is about 8% in 2018.

The typical stock Price/cash flow ratio: 21 (interest/EBI ratio of 7%).

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Company performance:

It seems that the demand for traditional tile products of this company from American corporate office market has been fluctuated in the past three years as indicated by the growth in sales volume, which is 4.5%, -5%, and 0% for 2017, 2016, and 2015 respectively. The growth in volume of 2017 is primarily due to introduction of luxury vinyl tile. And it seems that growth continue in 2018 supported by demand from corporate office, retail, and healthcare sectors.

The first six months of fiscal 2018 compared with the same period of 2017

Organic sales increased by about 8.8% (10.5% for second quarter) globally. Organic sales in America increased by about 9% (15% for the second quarter).

 The fiscal 2017 compared with the 2016

Organic sales increased by about 3.3% globally. Organic sales in Americas increased by about 3.5% primarily due to increase of about 4.5% in sale volumes offset by decrease of 1% in price.

Fiscal 2016 compared with 2015

Organic sales decreased by about 3.2% globally. Organic sales in Americas decreased by about 4.2% primarily due to decrease of about 5.2% in sale volumes offset by increase of 1% in price.

Fiscal 2015 compared with 2014

Organic sales increased by about 8% (estimated) globally. Organic sales increased by about 3.4% in Americas primarily due to increase of about 3.5% in price.

Its gross margin has gone up from about 34% of 2014 to 39% in 2018 primarily due to raised price and lower costs of raw materials. Due the increase of 140 basis points in SG&A as percentage of sales, its operating margin has thus gone up from 7% to 11% in 2018.

Stock price

This stock currently has an enterprise price/EBI ratio of 21 ($23). We think that its stock is being relatively undervalued considering its much better sensitivity of margin and potential in growth of sales.