Interface (TILE) is a manufacturer of modular carpet tiles that is the global leader in its niche market. While the stock has significantly outperformed benchmarks in the past year, an analysis of its financial metrics and growth rates reveals some risks. The company has high price-to-earnings and price-to-cash flow ratios compared to peers, and is expected to trail competitors in earnings and sales growth. Given its high volatility and lagging financials, the analyst recommends passing on the stock.

1. Interface, Inc. (TILE)
Analyst: Shariq Mohammad Ticker: TILE (NASDAQ) Sector: Industrials
March 31, 2014 Price: $20.59 Industry: Office Services & Supplies
Stock Performance:
Financial Metrics:
Price to Sales 1.40
Price to Book 4.50
Price to CF 29.50
Price to Earnings (FY1) 55.6
5 Year Projected Growth Rate 18.90%
PEG Ratio 0.90
Dividend Yield % 0.7
Return on Equity 7.66%
Market Capitalization 1.37B
Revenue
(M)
Sales
Change EPS ($) EPS Change
2016E 1117.83 7.0% 1.16 18.4%
2015E 1044.93 4.1% 0.98 58.1%
2014 1003.90 4.6% 0.62 -
2013 960.00 3.0% - -
2012 932.00 -2.2% - -
Company Description:
Interface is the worldwide leader, recognized
thought leader in sustainability, and largest global
manufacturer of modular carpet with a global
presence on four continents, and having more than
half of the business coming from international
markets outside of The United States.
Highlights
Growing Market: Interface is a market leader in a growing niche of modular carpeting that is slowly
making its way up in becoming a major global competitor of carpets. The carpet tile market is valued at
$3.0 billion globally.
Stock Performance: Interface is significantly outperforming the S&P 500, industrials sector index, office
services & supplies sub-index, and its peer groups.
Financials: Strong margins, increased sales, increased demand, and earnings have rebounded during 4Q
end, and have given the company a boost in performance.
Short Term Bullish Trend: Interface’s financials have also been rebounded by tax savings and cost cutting
initiatives, such things that cannot be replicated. Paired with having a high beta, this company may be
benefitting from a volatile short term bullish trend.
Investment Thesis
I recommend that we ‘pass’ this stock and not buy it. Even though the commercial services & supplies sub-
index is outperforming the S&P 500 with a return of 4.46% and TILE is out performing its own index with a
25.02% return, it possesses inherent risk which may not align with the long term interests of our portfolio.
Paired with its volatility, unfavorable financial metrics, and diversification risk, its best that we ‘pass’.

2. Investment Highlights
These outlined statements are designed to help analysts obtain a broader sense of what Interface
is doing to progress the company.
 Interface is the worldwide leader, recognized thought leader in sustainability, and largest
global manufacturer of modular carpet with a global presence on four continents, and
having more than half of the business coming from international markets outside of The
United States.
 Interface is starting to create a secular shift to move modular carpeting from a simple
niche, to a major category aligned with regular broadloom carpets aiming for a leading
global market share.
 Interface has established diversified end use markets including emerging markets, non-
office markets, and consumer representing nearly 50% of the overall business, effectively
reducing their dependence on mature office markets.
 Interface’s global sales (& presence) and marketing capabilities have created significant
opportunities in emerging markets that will experience growth faster than developed
countries.
 Interface created FLOR (consumer brand) which has introduced modular carpeting for
homes through the utilization of direct sales channels such as stores, catalogs, and online.
Industry Analysis & Market Outlook
Interface is part of the ‘commercial services & supply’ industry, a sub-industry for the
‘industrials’ sector. There are numerous sub-industries within ‘commercial service & supply’
which effect the positioning of the sector. Such industries are commercial printing, diversified
commercial/professional services, office services/supplies, HR, and environmental and facilities
services.
Global real estate correlates closely with commercial services & supply segment, more
specifically, with consumer demand related to Interface’s products. Greater growth and positive
sentiments for commercial real estate will correspondingly boost demand in commercial services
& supply segment; and vice versa. Currently, major global real estate markets have been
performing at a peak due to increasing momentum in capital markets- better than any time since
the Global Financial Crisis. Alongside, construction levels are rising in the markets developing
greater demand for ‘modern space’- which Interface is exactly providing. This year is expected
to bring the real estate market a lot of upside potential, complimenting improvement on the back
of a robust recovery within the U.S. economy, 6%-7% economic growth in China, lower oil
prices, and quantitative easing in the Eurozone- all which will value growth in business.

3. In reference to the ‘Direct Commercial Real Estate Investment’ diagram above, notice that there
is a 15% increase in real estate investment in the Americas, a 5% decline in investments in
EMEA (Europe, Middle East, and Africa), 5-10% increase in Asia-Pacific, and a net increase in
global real statement investment of 5-10%. Alongside with the ‘Global Office Completions’
diagram above notice the increasing amount of office completions since 2012 up until to the
projections for 2015-2016. Not only does this signify us of growing opportunity, but also the
reason why Interface makes half its business abroad in international markets.
Technology and energy firms are the most actively involved occupiers of the real estate markets
for the past several quarters. However, due to the sharp decline in oil prices, the backlash has
forced these sectors to reduce their share & cadence with oil for the time being while other
industries (healthcare, consumer discretionary, banking, etc.) become more involved in the
market- especially with the fact that consumers now have more disposable income. Risk is
present in markets that have been historically dependent on high capacity of energy, such as
Denver, Houston, & Calgary. Sustained decreasing oil prices will present challenges for such
markets- especially with the emergence of larger volumetric quantities of office supply and
product flow. Depending where and when, this can have a detrimental effect on Interface’s
business.
The diagrams below are positive indicators that the U.S. market is gaining positive momentum.

4. General Information, Business Segments, & Specific Market Data
Intermodal carpeting has tremendous benefits to it, ultimately innovating carpeting and tiles in
general. Few core benefits include, but not limited to: (1) creative design freedom (2) no glues or
pads (3) cheaper to change and replace than traditional carpets (4) produce less waste (5) faster
and more profitable installation for contractors (6) simple maintenance and reconfiguration (7)
easily recycled and repurposed.
The business segments for Interface are divided as followed:
 Modular Carpets
 Other Product & Services (TacTiles carpet tile installation system, traditional adhesive
and products for carpet installation/maintenance, Intercell® flooring product in Europe,
“turnkey” project management services for national accounts and other large customers)
At one point Interface used to sell broadloom carpet (“regular” carpet), and it was an integrate
part of the company’s business segments. In August 2012, the broadloom carpet segment
(referred as ‘Bentley Prince Street’) was sold to a third party. As a result, Interface no longer has
a presence in the broadloom carpet market. Selling off that portion of the business has allowed
Interface to centralize its focus on modular carpets and further innovate it, which truly is one of
the reasons why they have become the market leader in this niche. This was a good decision by
management as the global carpet market is penetrating the markets even further (and now being
valued at $3.0B globally). This can be seen in the diagram below.

5. Based on the excerpt of the 10K and quarterly reports, Interface management has provided a
diagram which visually portrays their carpet tile market share in the global market.
As
While Interface does have a significant market share in US, it has greater market share in
Australia, and greater market share overall internationally than domestically (resulting to why
they make more revenues abroad than in the U.S.).
Strengths & Competitive Advantages
Interface has many strengths that give it a competitive edge within the market. The principal
strengths of Interface are as follows:
 Market Leader in Attractive Modular Carpet Segment: Interface, Inc. is the global leader
in manufacturing modular carpet tiles. As growth for these tiles are becoming prevalent
across the globe, and now being involved in a market valued at $3.0 globally, Interface is
creating trends being trailed by competitors.
 Established Brands and Reputation for Quality, Reliability and Leadership: Interface,
Inc. is known for their high quality products, alongside with reliability and premium
positioning in the marketplace. Interface’s established brand names in carpets are leaders
in the industry.
 Innovative Product Design and Development Capabilities: Interface’s product design and
development capabilities have given them a significant competitive advantage, and they
continue to do so as modular carpet’s appeal and utilization expand across virtually every
market segment around the globe.
 Made-to-Order and Global Manufacturing Capabilities: Interface is able to provide
custom samples and deliver them quickly to customers. They can also generate realistic
digital samples allowing them to create virtually unlimited number of new design
concepts and to distribute them instantly for customer review.
 Recognized Global Leadership in Ecological Sustainability: Interface’s long standing
goal and commitment to be greener and ecologically sustainable has emerged into
becoming its competitive advantage.
 Strong Operating Leverage Position: Interface has strong operating leverage allowing
them to increase earnings at a higher rate than their rate of increase in net sales.
 Experienced and Motivated Management and Sales Force: Interface possesses a highly
skilled and dedicated team focused in overall growth and value creation of the company.

6. Challenges and Risks
Alongside to Interface’s strengths, it does face some challenges and risks associated with the
business.
 Sales of principal products have been and may continue to be effected by adversity in the
economic cycles during the renovation and construction of commercial and institutional
buildings: This is due to the fact that the activity is cyclical and will be affected by the
strength of a region’s general economy, interest rates, and other factors that lead to cost
control measures.
 Competition with large number of manufacturers: The main takeaway here is that these
manufacturers too are competing in floorcovering products market, and some of those
competitors have greater financial resources than Interface. The industry has faced
significant consolidation, but a large number of players still remain.
 Success dependent significantly upon efforts of senior management executives and
principal design consultant: Loss between any of the two could adversely affect outlook
of the company seriously.
 Substantial international operations subject to political and economic uncertainties:
Over half the business of Interface is abroad. Political and economic uncertainties are
great risks the company has undertaken. Restrictive taxation, government regulation, and
foreign currency fluctuations are very real threats.
 Unanticipated termination or interruption of Interface’s arrangements with their primary
third party suppliers of synthetic fiber can have a material adverse effect on them: Such a
risk exists because Interface does not have the capability to manufacture their own fiber.
 Significant amount of indebtedness: Could have negative impact on business operations.
Growth & Sales Profile
As mentioned above, sale of principal products may continue to be effected by adversity in the
economic cycles during the renovation and construction of commercial and institutional
buildings. The importance of this statement stems from the fact that Interface’s business is
largely driven by renovation and refurbishment, and partially by new construction projects.
Below is a diagram that portrays relating data.
New construction activity majorly drives growth for Interface only in Asia. As for renovation,
that is typically a 7-9 year cycle. Additionally, there has been a lot of pent-up demand recently in

7. commercial renovation, more so in mature office markets- all favorable factors for the company.
Taking a look at the below sales profile for the company will help facilitate a greater
understanding of sales by business and
markets. As you can observe below,
office markets account for 58% of
sales. Office market sales are up 5%
since last year, and have a large
dominance in mature commercial
markets. Interface will attempt to grow
an even greater share in this market,
further penetrate transitioning markets
(as they are lacking the most and only
account for 3% of sales), and increase
adoption of emerging carpet tile
markets.
Runner up to office markets is education. Noticeably, it is a good time for this market as
educational institutional construction is rapidly increasing throughout the U.S. which will result
in greater sales. The educational market (educational & hospitality are the largest opportunity for
Interface) is classified as ‘non-office commercial’, and Interface is attempting to grow its share
within diversified end use markets to better serve consumers. These efforts are aligned with
goals of expanding their store presence (19 FLOR stores), increasing commercial cross-over
opportunities, and acquiring new customers for the business. One of Interface’s focuses is to
expand their global presence of modular carpeting in hospitality and healthcare markets. Over
$3.4 billion in total sales opportunity exists in the United States alone and $2.5 billion in non-
office commercial markets. The potential for growth exists, but only the future entails the results
of these goals being met.
Interface (TILE) vs. S&P 500 vs Industrials Sector vs. Commercial Services & Supplies
Index
1 Year

8. Interface lagged during the first 1Q-3Qs of 2014. You can clearly see that as it was
underperforming well below its own sector. Upon closer inspection, you’ll notice that Interface
actually closed quite well in 4Q end. Take a look at the last 6 months snapshot of the returns
below:
To many analysts' surprise, Interface's stock has moved higher by 25.1% in the past 4 weeks,
topping consensus estimates and EPS projections. The solid thin blue line in the above graph is
the simple moving average (SMA) for Interface. Just recently the 50 day moving average broke
out above the 200 day SMA, ultimately suggesting a short term bullish trend for analysts and
investors. The company is utilizing upon favorable trends on the moving average crossover front
which has allowed them to close 4Q end with positive technical factors alongside with
declaration to a good earnings release.
Income Statement Analysis

9. Key Statistics Valuation
The above chart compares key statistics of Interface’s stock (TILE) with its peer group and top
competitors. I will break down the meaning behind each number to provide a better
understanding of how the stock is trading in relationship to its peers below:
 P/E: TILE has the highest P/E ratio in its peer group. This not only signifies an expensive
stock, but also that it is trading at a significant premium to its peers.
 Price/Projected Earnings: TILE presents a rather average price/projected earnings ratio,
as it is close to the industry average. Thus, it is trading at valuation on par with its peer in
terms of this ratio.
 Price/Book: TILE is trading at a discount, as its price/book ratio is below the industry
average. This can be a positive indicator because a lower price/book ratio will make a
stock seem more attractive to investors seeking stocks with lower market values per
dollar of equity on the balance sheet.
 Price/Sales: TILE is trading at a significant discount with this metric, as their price/sales
is quite below the industry average of 2.01. This ratio can be interpreted as to the value
investors are placing on each dollar of sales on the stock for the company.
 Price/Cash-Flow: TILE is trading at a significant premium to its peers with this ratio.
Looking at the cash flow statement, you’ll notice that the company has had some lagging
cash flows throughout 2014, carried into 2015 due to restructuring and other events.
 Price to Earnings/Growth: TILE is trading at a significant discount to its peers with this
ratio. This not only indicates lagging growth, but that there are more reasons than just
growth that are causing TILE to trade with higher multiple/premiums with some ratios.
 Earnings Growth: TILE is significantly below the industry average and is expected to
trail its peers on the basis of earnings growth rate. This is another negative sign for the
company, as elevated earnings growth rates (which TILE is lacking) lead to capital
appreciation and justify higher P/E ratios (which TILE clearly has).
 Sales Growth: TILE has a lower sales growth than all the companies listed above, and is
below the industry peer group average. This is a negative indicator that the company may
be, or is at risk, of losing its market share.
 Beta: Looking at the companies listed above, there is a degree of higher volatility in these
companies, and perhaps the sub-industry as a whole. Focusing specifically on TILE, this
company has one of the highest betas in the peer group and indicates a high degree of
volatility; 60% more volatile than the market, which is significantly high.

10. Earnings & Projected Earnings Analysis
The above table represents earnings and projected earnings of TILE along with its competitors,
and two other industrial sector stocks in my portfolio (UNP & LECO). EPS growth rate will help
us derive a higher quality valuation thesis of the numbers, as opposed to just looking at the
normalized rate. Between 2013-2014, TILE had a below average EPS rate. At 2015, you can see
that the EPS growth for TILE is at an astonishingly high of 58.06%, higher than all of its
competitors and even other companies (UNP/LECO) outside its industry. These strong earnings
are derived from the company’s great response in commercial real estate (Europe, USA),
restructuring, along with rebounding of revenue and demand (Europe, USA, and Asia) that is
expected to carry throughout 2015.
You can verify my work in the blue chart with this small EPS/earnings chart from TD-
Ameritrade. Adjusted EPS for the quarter came in at 0.24, above the analyst’s expectations of
0.17, creating a rather large positive surprise for investors. Growth listed to about 57-58% just as
I calculated. However, the growth is expected to decline back down to a more average amount at

11. 18.37% by 2016. These numbers do represent positive sentiment towards the company, however,
they reflect back to my previous point that this may very well be a short term bullish trend- even
as the SMAs suggest.
EPS Revisions
Interface has been experiencing solid earnings estimate revisions activity since last quarter to
present day. From October 2013 to October 2014 you’ll notice that there is a lot of downgrading,
no upgrading, and overall a lot of negative sentiment towards the stock by analysts. Since
November 2014 to present day, there hasn’t been any downgrading, and only upgrading and
unchanged estimates as revisions. November 2014 – January 2015 there was 3 upgrading
revisions per month. February 2014 to present day there is only 1 upgrading of estimates, and 4
estimates of unchanged revisions per month. This is good news, however, notice that the gaps
between the highs and lows expand as we get closer to present day. This is an indication of
analysts having uncertainty of the stock’s direction in the near future. Thus, indicating a possible
short term trend in the stock. The subindustry itself has been experiencing some positive trends
recently, and it can be attributing to bringing some positive metrics in the short term for all
companies within it.

12. Discounted Cash Flow Analysis
The following values are obtained after discounting the company using a present value factor
which was around the 5% cap rate. The following below is combining all the present value of
cash flows with a residual calculation of 2019:
The underlying question that needs to be answered is whether current financial results have
further increased Interface's potential to perform dramatically better in 2015 and grow beyond its
current levels, or whether a lot of growth is already tied into its shares and it will become
stagnant in the near quarters/years. Because cyclical trends have been positively effecting carpet
markets, ultimately increasing company margins, it’s hard to make a sound judgement (even
with a DCF) of how the future will be with the company (uncertainty of strong financial metrics
existing in the long run)- despite all the sound and excitement this stock his brought in 4Q end.
The data of this DCF is made upon hypothetical estimates and should be used to the discretion of
the analyst as this forward looking information is bound to change.
Stock Comparison

13. Above is a stock comparison between TILE, its peer group, and two other stocks from industrials
in my portfolio. Notice that TILE is bringing in the highest return, outperforming the S&P 500,
its sector, its peers, and both UNP & LECO stock in our stock portfolio. In fact, UNP and LECO
can be concluded to be underperforming relative to the data on this chart.
Recommendation/Conclusion
Upon careful consideration and thought, I recommend that we ‘pass’ this stock and not buy it.
Even though the commercial services & supplies sub-index is outperforming the S&P 500 with a
return at 4.46% and TILE is out performing its own index with a 25.02% return, I have reason to
believe that this not the best stock to invest in.
Pros:
 Strong margins, increased sales, demand, and earnings have all rebounded during the
fourth quarter giving the company a huge boost in performance.
 Margins and revenues are expected to continue rise throughout the year.
 Global economic trends are also aligned to meet favorable outcomes in this subindustry.
Commercial real estate has been experiencing positive trends and strong growth.
 Modular carpet tiles is penetrating the market further quarter to quarter, slowly becoming
a major player in global markets.
 Ecologically friendly processes to help the environment.
 Interface’s Australian plant is fully operating now, & its FLOR businesses are expanding
in North America.
 Gross margins expected to return to ‘normal levels’ at 35.5% (via 4Q conference call).
 Restructuring charges that were incurred in 2014 are expected to help the company this
year.
Cons:
 Financial results still skewed from sale of ‘Bentley Prince Street’ segment of business
 Increasing risk in foreign operations, as currency fluctuations is very prevalent, along
with the fact that more than half of business operations and revenues are from abroad
 Not much diversification of products within the company
 Secular growth exits with carpet tiles, but is not significant and has not lead to revenue
growth for Interface (stagnant growth overall)
 Analysts still uncertain about company meeting targets (this is also reflected in the EPS
revisions graph earlier in the report)
 While company’s stock have rebounded due to underlying factors of economic trends and
some favorable outcomes, they have also rebounded from tax savings and cost-cutting
initiatives that cannot be replicated. Thus, being a potential indicator of the uncertain
possibility for these financial trends to continue within the company (short term bullish
trend).
 Restructuring has occurred 5 times in the last 6 years and has finally made a positive
impact (occurring years: ‘08/09/10/11/12/14). Though it seems a bit artificial to me

14. because it appears that management is trying to purposely engineer its adjusted earnings.
Eventually, or perhaps even now, it’s hard to see how the company is going to cut costs
further down after all the restructuring.
 Success in the hospitality market is minimalistic (only accounts for 4% of company’s
total billings) along with the FLOR stores. These aren’t progressive in creating
sustainable secular revenue growth.
 Overall growth right now seems short term because of favorable trends. Interface needs
to generate more secular growth in the company, as revenue growth is lagging. In fact,
revenue growth needs to re-accelerate.
 Earlier in the report you can view key ratios that turned out to be unfavorable to my
liking. In a technical standpoint, Interface is not doing well.
 Interface has a beta of 1.60, the highest from its peer group, and indicating that this
company is subject to a lot of volatility within the market. I believe the performance of
the stock right now has a lot to do with the company’s volatility and that the company
may relapse to the way it was earlier in 2014.
 In the long run, I believe this stock is not the best choice for our portfolio.
Sources
Capital IQ
Yahoo Finance
Interface, Inc. 10K & 10Q reports