Rising Star Buy: Interface


This article is part of ourRising Star Portfolio series.

In February, I decided that carpet manufacturer Interface (NAS: IFSIA) was too pricey to buy for my Rising Star portfolio. But after last week's market mayhem, Interface's stock price has reached a far more promising entry point.

Sadly enough, this realization came in tandem with the passing of the company's visionary founder and Chairman Ray Anderson. Anderson lost his battle with cancer about a week ago, at the age of 77, adding a bittersweet note to this purchase.

The business
Atlanta, Ga.-based Interface was formed in 1973, producing the first "free-lay" carpet tiles in America. Bringing flexible modular carpet tiles to market to outfit and capitalize on the mid-1970s office boom was pretty revolutionary in its own right. However, founder Ray Anderson didn't stop there.

About 20 years later, Anderson experienced a green epiphany, catalyzing his decision to change his company's business strategy in an industry reliant on petrochemicals. He put the wheels in motion for Interface's "Mission Zero" promise to eliminate the company's negative environmental impacts by 2020.

In 17 years, Interface has slashed greenhouse gas emissions by 35%, fossil fuel consumption by 60%, waste to landfill by 82%, and water use by 82%.

Why I'm buying
Interface's history revolutionizing an environmentally unfriendly industry makes me pleased to buy in. Anderson's vision surely helped change some of his industry peers' opinions on building sustainable businesses. Rival Mohawk Industries (NYS: MHK) now has several of its own environmental initiatives in place.

The following Anderson quote reveals why this stock fits perfectly in my socially responsible Rising Star portfolio: "If we're successful, we'll spend the rest of our days harvesting yester-year's carpets and other petrochemically derived products, and recycling them into new materials; and converting sunlight into energy; with zero scrap going to the landfill and zero emissions into the ecosystem. And we'll be doing well ... very well ... by doing good. That's the vision."

Meanwhile, Interface's shares are far cheaper than they were last winter. Since February, the stock price has dropped about 23%. The shares now trade at a far more reasonable 12 times forward earnings, and the current PEG ratio of 0.98 looks like a great buy opportunity to me. Interface also pays a modest dividend, which sweetens the deal a bit more.

And now, the risks
The market turned volatile last week, as investors realized that the U.S. economy really is on shaky footing. Interface provides office and residential floor coverings, and it's expanding into areas like government, health care, hospitality, and retail to vie for opportunities that represent twice the $1 billion market for corporate office carpet. But shrinking budgets could challenge its growth.

Furthermore, customers willing to pony up for fancier flooring in this economy have plenty of options. Interface not only contends with Mohawk Industries, but also with companies like Armstrong World Industries (NYS: AWI) , Lumber Liquidators (NYS: LL) , Berkshire Hathaway's (NYS: BRK.A) (NYS: BRK.B) Shaw Floors, and a slew of private companies.

Interface has more debt than I'm usually comfortable with; its debt-to-capital ratio is currently 50.4%. Its solid 15.5% increase in revenue growth over the last 12 months softens that risk for me. But again, if impending economic weakness prompts a slowdown in business, the size of its debt load could come back to haunt the company.

Foolish bottom line
Interface CEO Dan Hendrix said of Anderson's passing: "Ray was and continues to be our company's heart and soul. His iconic spirit and pioneering vision are not only his legacy, but our future. We will honor Ray by keeping his vision alive and the company on course."

Companies with managers who understand they can do well by doing good are by far the favored buy ideas for my Rising Star portfolio. Interface embarked upon that path long before it became "cool." It's high time to roll out the red carpet for its entry into this portfolio.

At the time thisarticle was published

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