Over the last six months, MillerKnoll’s shares have sunk to $18.85, producing a disappointing 14.4% loss - a stark contrast to the S&P 500’s 3.7% gain. This might have investors contemplating their next move.
Is now the time to buy MillerKnoll, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think MillerKnoll Will Underperform?
Even with the cheaper entry price, we don't have much confidence in MillerKnoll. Here are three reasons why you should be careful with MLKN and a stock we'd rather own.
1. Revenue Tumbling Downwards
We at StockStory place the most emphasis on long-term growth, but within business services, a stretched historical view may miss recent innovations or disruptive industry trends. MillerKnoll’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 5.2% over the last two years. 
2. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, MillerKnoll’s margin dropped by 5.4 percentage points over the last five years. This along with its unexciting margin put the company in a tough spot, and shareholders are likely hoping it can reverse course. If the trend continues, it could signal it’s in the middle of a big investment cycle. MillerKnoll’s free cash flow margin for the trailing 12 months was 5.7%.
3. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
MillerKnoll’s $1.81 billion of debt exceeds the $193.7 million of cash on its balance sheet. Furthermore, its 7× net-debt-to-EBITDA ratio (based on its EBITDA of $221.5 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. MillerKnoll could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope MillerKnoll can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
We see the value of companies helping their customers, but in the case of MillerKnoll, we’re out. After the recent drawdown, the stock trades at 9.9× forward P/E (or $18.85 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better investments elsewhere. We’d recommend looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
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