Buy: Steelcase (NYSE: SCS)

Target: $23

Buy Up to: $17

Options Trade: Buy to open the January 19, 2018 call on Steelcase with a strike price of $15 at a price of $.95 or lower. Symbol (SCS180119C15)

Trade Rationale:

Steelcase is morphing its corporate furniture to fit into today’s office and hospitality lifestyle. Profits have struggled the past few quarters as the company revamped its product lines to entice customers.

Management called out a moderate but notably positive shift in customer ordering patterns this quarter and is on track for mid-twenty percent earnings gains in fiscal 2019 (ends February 2019).

While lower profits on products are often seen as a negative sign, Steelcase’s recent drop in gross margins (revenue less product costs) is a welcome harbinger of more competitive pricing to win over office and hospitality accounts eager to create mobile, creative workspaces.

It appears management has been sufficiently conservative in its guidance which includes a slow but positive ramp upwards in sales and profits. In the meantime, subscribers can enjoy a hearty 3.6% dividend yield.

Steelcase usually reports its November quarter earnings in late December. The January 2018 calls should encapsulate that next event date when I expect further good news on the company’s evolution to a more nimble mod furniture supplier.

My $23 target is based on a price to earnings (P/E) multiple of 20 on February 2019 estimate of $1.13, an estimate that reflects 24% earnings growth.

Look for details on Steelcase’s next earnings call as we get closer to the event.