With thousands of stocks to choose from, and just a few hundred of them garnering most of the attention, investors often overlook some diamonds in the rough.

For instance, have you ever heard Steelcase, Inc. (NYSE: SCS)?

Most have not, and that’s too bad because Steelcase has been crushing the market. Its 180% gain in the past five years almost makes the S&P 500’s 85% five-year return look meager. 

Steelcase has generated market-beating returns by becoming the world’s largest provider of workplace furnishings and architectural elements. Annual sales top $3 billion. That’s well ahead of main rivals like HNI Corp. (NYSE: HNI) and Herman Miller, Inc. (NASDAQ: MLHR), which currently have annual sales of around $2 billion. 

#-ad_banner-#​Steelcase’s broad product portfolio includes state-of-the-art panel-based and freestanding furniture systems, walls, workstations, lighting, desks, storage and seating. Although the firm is best known for traditional office-space components, it also markets to customers in the health care, academic and hotel/hospitality sectors.

What really sets it apart is a reputation for leading the most extensive shift in office space design to occur in several decades.

Management realizes work environments have become much more technology-based, team-oriented and mobile, with a greater emphasis on  video conferencing, central plug-ins, group work areas and open floor plans. Steelcase therefore develops solutions with the evolving workplace in mind. For example, a mobile office with staff that are on-site mainly for meetings or presentations has a greater area allocated to ergonomic, tech-packed conference areas.

What’s more, many of the firm’s designs emphasize the preferences of the 18-to-33, or Millennial, age group. That’s smart, since Millennials are fast becoming a major force in the workplace.

As the clear leader in workplace furnishings, Steelcase should benefit most from an emerging industry tailwind: greater confidence among business executives about the economy due to rising GDP, near-record corporate profits, stronger hiring and other factors. Simply put, business leaders are finally convinced the recovery is real and they’re ready to invest in workplace upgrades.

The natural replacement cycle, where companies refurbish their facilities, is roughly every 9-to-12 years, which should augment future sales of office furnishings, too, said analyst Josh Borstein of Longbow Research to Bloomberg recently.

Indeed, such sales are already starting to show improvement, according to industry shipment statistics from the Business and Institutional Furniture Manufacturers Association. After contracting slightly to $9.2 billion in 2012, shipments climbed to about $9.4 billion in 2013 and $9.7 billion in 2014. Shipments of $10.1 billion are projected for 2015.

Steelcase is clearly taking better advantage of the upturn than competitors. The firm boasts a three-year revenue growth rate of 7%, even though overall industry sales shrank 2% annually during that time. Net income rose at a 63% pace, compared with an average drop of 11% a year for the industry.
    
Extensive research is a key factor in this outperformance. Through customer feedback, analysis of financial performance metrics and collaboration with universities and other thought leaders, Steelcase constantly studies workplace habits and incorporates these insights into its products. The firm typically allocates 1-to-2% of sales to such research, spending more than $100 million over the past three years.

Periodically, management also seeks to boost performance through joint ventures. For example, a recent deal with Staples, Inc. (Nasdaq: SPLS) will highlight Steelcase products on Staples.com and at select Staples locations. The partnership should give Steelcase far greater access to small business, a group the firm has traditionally targeted through its Turnstone brand with some success. However, I expect the exposure to Staples’ huge customer base will bring much better results.

Steelcase has historically been a reliable source of dividends, and it kept paying one throughout the recession. Like many companies, though, it had to pare back the payout during that time and progressively cut its dividend from $0.60 to $0.16 between 2008 and 2011. But since then, the payout has nearly tripled back to $0.42.

With the U.S. economy finally upshifting, the 18% earnings growth rate analysts are projecting for Steelcase over the next five years looks achievable. That would push earnings to $1.79 a share during that time. At the current earnings multiple of 23, this implies nearly 130% upside for the company’s stock through 2019 to about $41 a share from about $18 now.

It also suggests Steelcase’s dividend could more than double to $1.06 by 2019, assuming the firm keeps its payout ratio at 59%. Based on my stock price estimate, shares would be yielding 2.6% at that point.

Risks To Consider: Steelcase shareholders should watch closely for signs of economic trouble abroad adversely affecting our own economy. Steelcase generates 72% of revenue domestically, so a downturn in the United States would certainly be a major headwind for the firm. Office upgrades are among the first budget items to be cut when things get tough.

Action To Take –> Despite global risks, the U.S. economy is emerging as an island of strength in a sea of weakness. This bodes well for the domestic office furniture industry and its top player, Steelcase. 

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